Base Rate Rise? Ask SONIA
December 8, 2011
Unsurprisingly, the Bank of England (BoE) has voted to keep interest rates on hold again and it seems everyone is talking about how long they will remain at such low levels for. Taking a quick glance through the finance pages, even the economists can’t agree.
The first increase is expected to occur anywhere between 2013 and 2015 – quite a range of ‘predictions’ (with a spread like that, it’s hard to think of them as ‘forecasts’). So we thought we’d ask SONIA. No, not the Liverpudlian pint-sized pop princess, the Sterling Overnight Index Average.
However, a quick word of caution; expectations have been changing markedly. It was only 30 days earlier, on 1 November, that markets indicated that the base rate would start to rise in mid 2013. With the current economic uncertainty, it’s not surprising that there’s a degree of volatility in the markets and predictions, but it’s safe to say that base rate is unlikely to rise any time soon. In the Autumn Statement, the Chancellor revised 2012 GDP growth expectations downwards from 2.5% to 0.7% indicating that economic recovery will be more protracted than previously thought.
The UK needs GDP growth to keep our debt manageable; excluding the amount injected to bail out the banks, we currently owe £967 billion (up from £837 billion a year ago) and consumer debt is a little over £1.5 trillion.
At the moment, the Bank of England is more concerned with avoiding a double dip recession than with inflation; latest figures show inflation fell from 5.2% in October to 5.0% in November and the BoE is adamant that it will reduce further throughout 2012. In any event, I’d suggest that the fragile state of the economy means it’s unlikely that base rate would rise even if inflation does remain high. I wonder if Sonia would agree?
What do you think?
SONIA: Sterling Overnight Interbank Average, sometimes referred to as the Sterling Overnight Index Average
It provides a methodology for fixing Overnight Indexed Swaps and was introduced by the Wholesale Markets Brokers’ Association (WMBA) in March 1997. It contains very little credit risk because it embodies expectations of movement in an overnight rate, so is a relatively accurate indicator. By examining the rates of SONIA swaps with differing maturity, it’s possible to establish when the money markets expect a change in base rate to occur.