A case study: Realised SONIA Rate in 2023 vs. SONIA Forward Curve projections in 2022

A Closer Look at SONIA: What We Expected and What Actually Happened

Let's talk about SONIA, the overnight interest rate that banks in the UK use when they lend to each other overnight.

It's a big deal because it helps set the rates for many other loans, including the one you might have on your home or business. Now, back in September 2022, experts thought this rate would go up quite a bit by the end of 2023 (from 1.5% in Sep 2022 to 4% in Sep 2023). But that's not quite how things played out, SONIA rose by far more, reaching 5.2% in Sep 2023

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Expectations vs. Reality – A case study from September 2022

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In a market where predictions can be as volatile as the rates themselves, September 2022 offered a good example, just before the interest rate hiking cycle begun, as central banks took to combat inflation. Markets anticipated the SONIA rate to ascend to 4.25% by the close of 2023 (marked by the red line in the graph below). The graph from that period, depicting both the projected SONIA forward curve and the realised SONIA rates, paints a clear picture of expectations set against the stark lines of reality.

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SONIA is based on the average interest rate at which banks lend money to each other overnight. The SONIA rate is used to set a variety of interest rates, including mortgages for our homes, larger loans to fund projects and in the derivative market.

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SONIA: Expectations vs. Reality

In Sep 2022 the market projected that the SONIA rate would reach 4% by the end of 2023. However, at the time the actual SONIA rate in September 2022 was only 1.5%.

There are a few factors that could be causing this divergence. First, the Bank of England has been more cautious in raising interest rates than the market expected. The Bank of England has raised interest rates twice in 2022, but it has signaled that it is likely to take a more gradual approach to tightening monetary policy in the coming months.

Second, the economic outlook has deteriorated since the market made its projections. The UK economy is expected to grow more slowly in 2023 than previously thought, and there are concerns about a recession. This has led to lower expectations for inflation, which has also contributed to the lower SONIA rate.

The Future of the SONIA Rate

It is difficult to say what the future holds for the SONIA rate. The Bank of England has said that it is prepared to raise interest rates further if necessary to bring inflation under control. However, the economic outlook is uncertain, and it is possible that the Bank of England may need to slow down its pace of tightening.

Ultimately, the SONIA rate will be determined by a number of factors, including the Bank of England's monetary policy decisions, the state of the UK economy, and the global economic outlook.

Conclusion

The divergence between the expected and actual SONIA rate is a reminder that the future is uncertain. The Bank of England is likely to continue to monitor the economic outlook and adjust its monetary policy accordingly. Investors and businesses should be prepared for the possibility of further interest rate hikes in the coming months.

Additional Information

• The SONIA rate is calculated by the Bank of England and published each day.
• The SONIA rate is used to set a variety of interest rates, including mortgage rates, bank lending rates, and interest rates on financial products such as swaps and futures.
• The Bank of England has raised interest rates twice in 2022, from 0.1% to 1.25%.
• The Bank of England has signaled that it is likely to raise interest rates further in the coming months, but it has not given a specific timeline.
• The UK economy is expected to grow more slowly in 2023 than previously thought.
• There are concerns about a recession in the UK.
• The Bank of England is monitoring the economic outlook and will adjust its monetary policy accordingly.

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