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Sterling interest rates on the rise

The end of last week saw a few important market moving events which led to a 20-30bps increase in swap rates and Gilts across the curve. In particular:
  • CPI year on year inflation grew to 2.9% for August, 0.1% above consensus and up 0.3% versus July.
  • The Bank of England’s MPC released minutes showing an increasingly hawkish stance on rates, with one external committee member subsequently stating that the need for a rate rise was approaching.

In the wake of these short term events, one Centrus client in particular was able to unwind two tranches of long dated interest rate swaps, saving c.10% from the break costs over 2 days, demonstrating the value of treasury teams being sufficiently flexible to act opportunistically in volatile markets.

The Centrus house view is that absent any sharp downturn in data or external geopolitical factors, a fundamental directional rate shift is now imminent, with a first Bank of England rate rise likely in November. This is reflected in the forward market pricing we have already witnessed, displayed in the shift of the Sterling swap curve:

Over the longer term, the real debate centres around the diverging policy between the US Federal Reserve with its higher rates, and the Bank of England with the European Central Bank and its lower rate policy. The impetus for low rates and tapering are weaker given rising GDP and employment rates across the continent. The Global rate differential as well as continuing uncertainty over Brexit continue to weigh down on Sterling, with the impact of currency weakness feeding through to the higher inflation numbers.

Here at Centrus we continue to monitor these developments carefully, and in particular the client risks and opportunities across the credit, rates, inflation and foreign exchange markets.