Rising hedging costs in January are a reminder that interest rate risk hasn’t gone away
The Bank of England’s Monetary Policy Committee (MPC) meets on Thursday and is widely expected to keep rates on hold at 5.25% for the fourth meeting in a row. At the previous MPC meeting, committee members voted 6-3, with those in the minority all voting to lift the Base Rate by 0.25%. As the inflation outlook has continued to improve, markets expect the MPC to indicate a pivot to a more dovish stance. A change in the vote count and/ or softer language in the press statements will be the focus of attention.
Although official interest rates have been unchanged since August, market rates have been quite volatile and the divergence between the hawkish official stance from the MPC and market positioning over the second half of 2023 continued to widen. Some of this shift lower in the implied path for SONIA has been reversed over January- for example, 3 year rates rose by 0.31%. Despite this reversal, the market still has 4 cuts priced in for 2024, with a first cut priced in for the June meeting.
The sharp move higher over January reminds us that complacency in the face of such uncertainty over the future path for SONIA can pose substantial risks as market rates could reverse higher if inflation doesn’t continue to fall towards the 2% target. Borrowers who fail to stay informed and adapt their financial strategies may find themselves exposed to unexpected and potentially adverse changes in the SONIA curve and rates environment. This is especially true for borrowers refinancing or considering new investments over 2024.
Vuca Treasury is a specialist interest rate and currency hedging advisor. Please feel free to contact the team at firstname.lastname@example.org if you’d like to review your interest rate risk position
This blog has been prepared by Vuca Treasury Ltd and is for information purposes only and does not constitute investment advice. The information contained herein is based on materials and sources that we believe to be reliable. However, Vuca Treasury makes no representation or warranty, either express or implied, in relation to the accuracy, completeness or reliability of the information contained herein. Except in the case of fraudulent misrepresentation, no liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of this document. No client-advisor relationship shall be created as a result of this presentation and/ or your use of the information contained in it. A client relationship shall only arise where you become a client of Vuca Treasury by way of our formal engagement agreement.