GBP Swap Rates: Key Movements Over the Past 6-12 Months

Introduction

Interest rate swap markets have been highly volatile over the past year, driven by evolving economic data, central bank policy shifts, and broader financial market conditions. In this article, we analyse how GBP swap rates have moved over the last 6 to 12 months, using key market data and charts to provide insights into evolving trends and expectations for the future.

GBP Swap Rate Curve: Then vs. Now

The GBP OIS (SONIA) swap curve has changed significantly over the past year:

• Short-term swap rates have declined sharply, with the 1Y OIS rate falling from 5.20% a year ago to 4.20% today, as markets anticipate Bank of England rate cuts.
• Longer-term rates have remained relatively stable, with the 10Y OIS rate only marginally lower, reflecting a belief that rates will settle at a higher long-term level.
• The curve has steepened, suggesting that while near-term easing is expected, markets see a floor for long-term borrowing costs.

Short- vs. Long-Term Swap Rates

Recent movements in the 5-year and 10-year GBP swap rates indicate a shift in market expectations:

• The GBP 5Y swap rate has now fallen below the 10Y rate (3.91% vs. 3.99%), a reversal from previous months where they were nearly equal or inverted.
• This steepening suggests that the market is now pricing in a more aggressive rate-cutting cycle, with expectations that the BoE will ease policy sooner rather than later.
• However, the relative stability of the 10Y swap rate indicates that markets do not expect rates to return to ultra-low levels, reinforcing a long-term neutral stance on borrowing costs.

Swap Spreads and Market Expectations

The GBP 2s10s swap spread, which measures the difference between 2-year and 10-year swap rates, provides key insights into market sentiment:

• The spread has been inverted for most of the past year, meaning short-term rates are higher than long-term rates. This suggests that markets expect economic slowdown and monetary easing.
• Six months ago, the spread was around -0.80%, but more recently, it has moved closer to -0.40%, indicating expectations that the BoE will soon cut rates, leading to a steeper yield curve.

Historically, an inverted swap curve is seen as a signal that the economy may be slowing, prompting central banks to shift toward a looser policy stance.

GBP Swap Rates vs. SONIA and the Bank of England Base Rate

The relationship between GBP swap rates, the Bank of England base rate, and SONIA (Sterling Overnight Index Average) provides insights into how markets anticipate interest rate changes.

• The BoE base rate currently stands at 4.50%, while the GBP 3M swap rate is at 4.42%.
  • This suggests that markets are pricing in rate cuts within the next few months.
• Despite this, the 5Y and 10Y swap rates have risen in recent months, moving to 3.91% and 3.99% respectively.
  • This divergence suggests that while markets expect cuts in the short term, they are less convinced about deeper long-term cuts.
  • It also implies some uncertainty around inflation or economic resilience, which could be keeping long-term borrowing costs elevated.

When swap rates fall below the BoE base rate, it typically reflects market confidence that the central bank will start cutting rates soon. However, the recent uptick in 5Y and 10Y swaps suggests that markets may be reconsidering how low rates will actually go over the long term.

For businesses considering hedging strategies, this shift highlights the importance of evaluating whether locking in swaps now provides a better opportunity than waiting for potential further declines.

Implied Market Rate Expectations

Market-implied rate expectations from Overnight Index Swaps (OIS) pricing indicate:

• By August 2025, the market expects the BoE’s policy rate to fall to approximately 4.05%, down from 4.50% today.
• By early 2026, the implied rate is around 3.85%, suggesting multiple rate cuts over the next 12-18 months.
• The market is pricing in 2 to 3 cuts over the next year, with a gradual path toward lower rates rather than an aggressive cutting cycle.

These projections reinforce the gradual easing path that markets expect from the BoE, rather than a sharp pivot to lower rates.

What’s Next?

Looking ahead, the key drivers for swap rates include:

• BoE Policy Shifts: Market expectations for rate cuts in late 2024 or early 2025.
• Inflation Data: How CPI prints influence the outlook for monetary policy.
• Global Factors: US Fed and ECB rate movements, risk sentiment, and macroeconomic trends.

The market continues to watch for BoE forward guidance and key inflation prints to determine the timing and magnitude of future cuts. Businesses with exposure to floating rates should consider hedging strategies, given that uncertainty remains around the pace of policy easing.

Conclusion

The past year has seen a significant shift in GBP swap rates, driven by evolving central bank policy expectations and global economic conditions. Markets now expect the BoE to begin cutting rates within the next six months, with short-term swap rates already declining in anticipation.

However, longer-term rates remain stable, suggesting that while monetary easing is expected, borrowing costs are unlikely to return to the ultra-low levels seen in previous years. Businesses with interest rate exposure should remain proactive in managing their hedging strategies to navigate this changing landscape.

If you would like to discuss any of the above in further detail, please get in touch and a member of our team will be able to assist you.

If you have not previously read our article on independent interest rate caps, please click here. 

You can view GBP swap rates on our Daily Market Rates sheet by clicking here.

You can reach us on 0207 183 2277 or at info@vedantahedging.com.

Andrew Hiddleston

Andrew Hiddleston