Interest rates: Bank of England expected to increase base rate

Friday, 03 Aug, 2018

The Reserve Bank of India (RBI) on Wednesday announced a second straight 25 basis points hike in repo rate to 6.5 per cent.

At midday on Thursday the Bank of England is expected to raise interest rates for only the second time in a decade.

Repo rate has been raised by 25 basis points to 6.50 percent.

But BoE Governor Mark Carney says that, even if Britain's economy is growing only modestly, it risks overheating unless borrowing costs rise from their crisis-era emergency lows, something the central bank began in November with its first rate hike in more than 10 years.

Naveen Kukreja, CEO and Co-founder, Paisabazaar.com: "Home loans will become costlier for fresh borrowers as and when the banks raise their respective MCLRs".

"That will then force the banks to push through the bank rate rise".

The minutes explained that Brexit is still one of the most important considerations for the bank's rate-setting committee.

Driving these decisions are signs that inflationary pressures that have mostly lain dormant for years are strengthening as the global economy enjoys a robust, if uneven spell of growth, led by a booming U.S. Figures released Thursday by the Organization for Economic Cooperation and Development showed global inflation hit a four-year high in June. If rates do go up to 0.75% that will be highest since early 2009.

"Weather effects - both the snow-related disruption in February and March and the unseasonably warm weather and long sunshine hours in May and June - seemed to have accounted for around half of the second quarter rise". At the same time, he gave no indication that policy makers see a need to accelerate the path of rate hikes. Five of the six members on the rate panel voted in favour of a rate increase.

But it also said inflation - now running at 2.4 per cent - was set to rise slightly higher than it had predicted in May's set of forecasts after recent falls in the value of the pound and higher energy prices. "The RBI may continue to focus on inflation, fiscal deficit and global geopolitical uncertainties".

The projected inflation rate is above its targeted comfort level of four per cent.

The majority of mortgage-holders, who have fixed rates, will not see a difference. "Steel consumption also accelerated in May", the central bank said in a media release. Sterling will follow these discussions - and the prevailing sentiment remains negative - now that monetary policy influence is pushed further into the future.

BoE officials cited inflation that is expected to remain above the 2% target for the duration of the Bank's forecast horizon as grounds for the decision and raised their economic growth and inflation forecasts in the Bank's quarterly Inflation Report. "This policy's current rate hike was already factored into our evaluation of deposit rates and there would no such immediate reaction to it", said Rajeev Ahuja, executive director, RBL Bank.