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RBI increases key rate to 6.5% on inflation worries

05 Août 2018

The Bank of England has increased interest rates for the second time since the financial crisis in a widely expected move.

Benson Hersch, CEO at the ASTL, said: "Today's announcement that interest rates are rising will as expected have a major impact on longer-term lenders, as they may feel compelled to raise rates".

It also seems unlikely the United Kingdom will return to interest rates of 5% and above.

Similarly, the reverse repo rate, at which it borrows from banks, was also raised by a similar proportion to 6.25 per cent. However it doesn't actually change too much on the ground.

"But sub-trend growth and a cloudy outlook hardly make a compelling case for a higher United Kingdom rates".

What do you want to know about the interest rates rise?

Carney said during a press conference that improving wage growth and a strong labor market led to the unanimous vote for a rate hike.

But the Bank thinks that weakness might just be specific to the capital and may not say much about the prospects for the United Kingdom housing market as a whole. For example, November's 0.25% rise brought little immediate benefit for Isa savers, but returns on cash Isas went up from 0.36% to 0.94% in January.

The RBI's rate move is the second in eight weeks and follows emerging-market counterparts in Indonesia, the Philippines and elsewhere who are trying to counter currency routs and inflation risks triggered by higher U.S. rates and a stronger dollar.

Savers will welcome the increase, but mortgage holders on variable terms will be negatively affected by the decision. MCLR hikes, however, will not immediately impact most existing home loan borrowers as they will continue to pay their existing lending rates till the next reset date of their loan.

The BOE's reading of market rates now signals that another 25-basis-point increase isn't likely until the first quarter of 2020, compared the third quarter of 2019 seen in the previous round of forecasts.

He said: "Someone on the average 4.75% standard variable rate borrowing £150,000 over 25 years would save over £6,000 over two years (before fees) by switching to the best two year fix".

Investec predicts a quarter-point rise every six months until rates reach 1.5% in 2020.

Killol Pandya, Head, Fixed Income, Essel Mutual Fund, said, while market is discounting a rate hike, he believes it is a touch-and-go matter with nearly even probability of rate action. This means older people get better value for their money on this form of insurance product.

Bank deposits at Rs 114.8 lakh crore grew by 0.5 percent during April 1- July 18 compared with a contraction of (-) 1.5 percent growth in the corresponding period past year. Markets expect just the one increase in 2018, to follow the one announced in late 2017.

"Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand", the central bank said, adding that investment activity remains firm even as there has been some tightening of financing conditions in the recent period.

RBI increases key rate to 6.5% on inflation worries