Interest rates: Bank of England expected to increase base rate

George McgeeAug 03, 2018

The Bank of England raised its interest rate by 25 basis points to 0.75% Thursday, marking only the second increase in Bank Rate since the financial crisis, but also a second within the past year.

In a statement after today's meeting, the RBI's monetary policy committee said that the repo rate had been hiked with the objective of achieving a medium-term target for consumer price index inflation of 4 per cent, while supporting growth. Upside risks to inflation remain on account of crude oil price rise, volatility in global financial markets, rise in households' inflation expectations, higher-than-average hike in MSPs for Kharif crops, and fiscal slippage both at Centre and state levels. At the turn of the interest rate cycle, deposit rates went up by 25-50 bps in one go, public sector bank executives said.

Projection of GDP growth for the financial year 2018-2019 at 7.4 percent and 7.5 percent for Q1 FY20.

That was the first increase since January 28, 2014 when rates were hiked by a similar proportion to 8 percent.

Repo rate is the rate at which the RBI lends short-term money to commercial banks, while reverse repo rate is the rate at which the central bank borrows money from commercial banks. It is the first time since October 2013 that the rate has been increased at consecutive policy meetings.

The decision to raise interest rates was widely expected by economists but views on whether or not the hike was justified were decidedly mixed.

Economists had been predicting the rise given that the economy had performed in line with the Bank's last forecasts in May, when it backed off from a widely anticipated hike to wait and see how the economy recovered after a weather-hit start to the year.

But the resulting fall in Pound Sterling - still under enormous threat as Brexit concerns weigh on the currency - was based on the BOE's slow stance to catch up with other central bank hawks. However, it's ultimately up to the banks about how much their want to increase this. 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. In a rising rate scenario, it makes huge sense for customers repaying loans to make periodic principal pre-payments.

The difference in the market's reaction to the same quantum of rate hike shows its distress.

"However, some lenders have increased rates, with 28 providers increasing some rates in July". And the "new normal" was half that, at 2-3% once inflation is included.

"Excluding the impact of HRA revisions, CPI inflation was projected at 4.6 per cent in H1 and 4.7 per cent in H2".

Calculations by UK Finance suggest a 0.25 percentage point base rate rise passed on in full to borrowers could add around £16 to monthly repayments for those on tracker rates and around £12 on an SVR, based on typical amounts outstanding.

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