Market update
- Since the last monthly update, the market has shifted to a more inflationary outlook and projection of higher interest rates for longer. The Government’s commitment to investment in the Autumn Statement is a key driver to the change in outlook. The US Election added to the markets
conviction with President Trump’s policies considered inflationary across the world economy. - The rise in Employers NI Contributions will add c. 3% to Housing Association staff costs, with most of the increase caused by the fall in the threshold to £5,000 from £9,100. The lower the average cost per employee, the greater the cost impact.
- October CPI of 2.3% was higher than the 2.2% expectation, with the jump from 1.7% in September due to the c. 10% increase in the energy price cap from 1 October 2024.
- Service inflation of 5.0% and wage growth of 4.8% reinforced the market outlook that inflation will remain persistently above 2% requiring the Bank of England to hold rates for longer.
- Prior to recent events and data releases, the inflationary outlook had dampened, and we saw a low in swap rates in September (3.4% for the 10 year). The swap curve rose for 6 weeks from that low in response to the revised inflationary outlook, and the 10-year swap is now steady at 4%. Gilt yields followed a similar path with the 30-year gilt yield up to 4.9%.
Implications for clients
- The higher inflation outlook will moderately improve rent increase projections with September 2025 CPI currently projected at 2.8%. However, the rise in Employer NIC and variable rate projections will more than offset this modest gain.
- As tempting as it is to speculate on future interest rate movements, we remind clients that interest rate risk management focuses on exposure to variable debt, headroom on covenants and policy limits. There is an equal chance the market projection will move up or down.
- With the spread between gilt yields and swaps back at a high (the 10-year gilt yield is c. 50bps higher than the swap), we anticipate a continued focus on new funding from the bank market and recommend clients remain aware of the capacity limit for their banking portfolio and review short term maturities.
Recent client activity
Centrus is busier than ever, actively advising clients on hedging and risk management across its core sectors of social housing, infrastructure, and other essential services. The demand for this expertise is being driven by heightened market volatility, the maturity of existing hedging arrangements, and a growing focus on achieving greater certainty around the cost of capital.
In addition to hedging, mergers and treasury strategy execution remain particularly active areas. Loan portfolio restructuring continues to play a pivotal role, delivering tangible value to clients and creating improved covenant headroom.
To learn more about our work in the affordable housing sector, click here.
For more information, please contact Paul Stevens or John Tattersall.
