SONIA Forward Curve
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Sonia Forward Curve Forecast 2023


Forward curves are often useful for forecasting floating-rate debt. These forward curves are used to price SONIA and EURIBOR based derivatives including swaps and interest rate caps. The forward curve represents the market’s current expectations or prediction for future interest rates (live pricing on Bloomberg and Refinitiv platforms). Given the unpredictable nature of energy prices, global recession risk, geopolitical risks, etc accurately predicting the forward curve can be difficult. 

SONIA 3 Year Swap
Current SONIA Rate

As per the chart above, 3-year swap rates were trading sideways over June and July until it became evident that the Bank of England would increase the pace of its monetary policy tightening from the standard adjustment of 0.25%. The shift to larger 0.50% & 0.75% adjustments saw 3-year term rates rise from 2.33% at the end of July to 3.96% by mid-September.

The swap rates  have been extremely volatile over July 2023, the 3 year swap rate went from 5.95% on July 6th to closed at 5.28% on July 21st, a fall of 68 basis points in 2 weeks, which is a cost saving of over £200K on a £10m loan. Banks will often cite volatility as a reason to charge higher rates, meaning you may not be getting the true cost saving if you do not have an advisor.  On the 31st of July the 3 year swap rate closed at at 5.31%.


Implied volatility, a major component of Cap pricing has also fallen sharply as stability has returned to trading conditions. The combination of a levelling in the SONIA forward curve and a lower risk premium for the UK has resulted in lower hedging costs for borrowers over the past few months. The cost per £10m to cap SONIA at 5% for 3 years is now £253k, £100K less than the £352k per £10m it would have cost to buy a Cap on the 6th of July. Reduced cost and stable trading conditions make this an attractive time to consider hedging interest rate risk on SONIA debt. 

Sonia vs Base Rate

SONIA Update 1

The UK Base Rate is currently at 5%. The Bank of England’s monetary policy committee meet next on the 3rd of August and the market has fully priced in a 0.25% rate hike, to take the Base Rate up to 5.25%%. A further 0.85% in rate increases from the Bank of England are fully priced in by financial markets by March 2024 where the market then expects the central bank to cut rates.

Sonia Forward Curve

The market is now forecasting that SONIA will peak just above 6% by April 2024 before reverting to the 5.5% level compounded SONIA is expected to average at over the next 3 months. The inverted curve is also helping to bring down the cost of hedging as Caps at higher strikes, say 6%, are “out of the money” at the back-end of the 3-year term. Normally, most of the cost of a Cap is incurred towards the back end of the hedging period so the inversion in SONIA forward rates is a welcome development

SONIA Forward Curve

Check your financial covenants

Borrowers should consider the impact of rising debt service costs on their financial covenants. When hedging, most borrowers look to/ are required to hedge their debt to minimise the risk of a breach of the interest cover covenants.  Rising interest rates will have an immediate impact on any covenants which are focused on monitoring the ability to service debt costs such as debt service/interest cover. A breach of your debt covenants may lead to a response from the bank which may include accelerating the repayment of the loan


·         Stability has returned to UK markets in recent weeks reducing the cost to hedge


·         Pricing now for Caps are at their best levels since the July inflation data 

Martin Mulligan

Martin Mulligan

Martin Mulligan has arranged funding and improved the management of FX, interest rate and commodity risks for clients for over 25 years