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UK swap rates rise following BOE Inflation report

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Five-year swap rates rose 10bps to 1.3450% and the pound jumped a cent against the US dollar to $1.40 following the release of the BoE Inflation Report this afternoon.  

Whilst the vote to leave rates on hold was unanimous, the wording of the minutes were hawkish and a hint of an earlier rate rise, and potentially to a greater extent.  The language was firm in its intention; that inflation above the 2% target will not be tolerated

During the press conference, Carney cited very little spare capacity, strong global growth and increasing confidence in wage inflation growth in support of the need to raise rates.  The market is now pricing in a 70% chance of a rise by May and a 100% chance of a rate rise by August. The market implied 3m LIBOR rate for February 2019 is now at 1.03% versus today’s pre-Inflation report level of 0.53%.  

The risk of rising rates has definitely been low down the priority list for many borrowers; seeing any hedging decision as too high an opportunity cost. This sanguine view is definitely changing as higher rates now has a real impact; feeding through into higher interest costs.  

JCRA are seeing an increased number of clients seeking to mitigate this risk through a variety of risk management strategies and would be delighted to assist in helping your business identify and manage your exposure to rising interest rates.

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