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Bank of England raises Bank Rate to 0.75%

03 Août 2018

"Every saver now has their fingers crossed that this latest base rate rise may go some way to returning rates to those levels, but like last time, providers are likely to be slow to react and choosy with their increases".

Several economists have challenged the need for a rise now, given not only the Brexit risks but also the potential damper on global growth from U.S. President Donald Trump's import tariffs and counter-moves by other countries.

Similarly, the BoE's new inflation forecasts will be watched as a sign of whether it thinks investors are being too relaxed by betting on no follow-up rate rise until late 2019 and only one more nearly at the end of its three-year forecast period. Bank staff believe this weakness was temporary and expect the economy to expand by 0.4% in the second quarter.

Of the total six members of the MPC, five members - Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel - voted in favour of the decision, while Ravindra H Dholakia voted against the decision to increase the repo rate. "These numbers clearly indicate that the markets are now recovering from the shocks of structural changes and policy reforms". Markets are already expecting a rise, and from here on in, further hikes are going to be few and far between because United Kingdom economic growth is so fragile.

Andreas Steno Larsen with Nordea Markets recommended selling Sterling going into the meeting, having expected the currency to take a hit as the Bank opts to keep interest rates unchanged.

'As a mutual which is owned by its members, it is our priority to deliver highly competitive and sustainable rates for both our savers and borrowers'.

In reality, however, it's not so simple.

The hike will make United Kingdom mortgages and loans more expensive, but should boost returns on cash tucked away in domestic savings accounts.

However, existing home loan borrowers will not be immediately affected as they will continue to pay their existing interest rates until next reset date of their loan arrives. New rates are effective from 1st August.

Analysts say that the hike will not have a major affect on non-resident Indians (NRIs) in the UAE, except those who are holding floating mortgage rates back in India because most of the existing auto and personal loans are obtained at a fixed rates.

Union Bank raised its one-year MCLR by 10 bps to 8.55% while Kotak Mahindra raised its one-month and three-month rates by 5 bps to 8.20% and 8.55%, respectively.

"The Bank's calculations suggest that the final destination of the Bank rate is somewhere between 2% and 3%, but also highlighted that the current equilibrium rate (r*) is still lower than that".

While pay is finally starting to outpace price rises, wage growth remains modest by historical standards.

The third-quarter 2018 inflation forecast is raised from 2.4% to 2.5% while the third-quarter 2019 inflation forecast is raised from 2.1% to 2.2%.

However, investment platform Hargreaves Lansdown has warned savers not to expect much from today's rise, as the typical account will still yield less than inflation, meaning the benefits to your bank account will happen slowly over a long period of time. Now is a good time to consider switching your banking products, as banks will be reviewing their rates.

Bank of England raises Bank Rate to 0.75%