Economy

Base rate rises to 0.75%

Base rate rises to 0.75%

RBI Governor Urjit Patel at the third bi-monthly monetary policy press conference.

The Reserve Bank of India on Wednesday raised interest rates for the second straight meeting, but retained its "neutral" stance as it aimed to contain inflation while not choking growth.

Members of the nine-strong Monetary Policy Committee (MPC) voted to increase rates from 0.5% to 0.75% in only the second rise since the financial crisis struck, following last November's quarter point hike. The marginal standing facility (MSF) rate and the bank rate were also raised to 6.75 per cent.

Overall inflation rate rose from 4.5% to 4.6% between May and June, while retail inflation edged up to 5% - significantly higher than the bank's 4% target.

A survey published by the British Chambers of Commerce on Thursday showed half of British firms planned to increase pay by more than 2 percent over the next year, echoing other signs of a slow improvement in pay growth.

"We continue to view even the tentative tightening embarked on since late 2017 as an unnecessary risk, and see several reasons why a hike is not justified at this point", John Wraith, a strategist with UBS, told clients in a note.

The move will make the home loans dearer and will have direct impact on the borrowers as the rate hike will lead to banks raising their interest rates in loans.

Impact on Bank Fixed Deposits With an increase in policy rates, bank deposit rates are expected to rise as well.

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"Scotland's growth over the last three years has lagged behind the United Kingdom, so whilst the Bank may judge that the United Kingdom economy is in sufficiently robust health to cope with a rate hike, a rate rise in Scotland may be more of a challenge".

"Steel consumption also accelerated in May", the central bank said in a media release.

HMRC interest rates are linked to the Bank of England base rate and, as a outcome of the change, HMRC interest rates for late payment will be increased.

Changes to the Bank rate affect tens of millions of savings accounts, loans and mortgages.

Yes Bank's managing director and chief executive officer, Rana Kapoor, said, "With peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, I expect a pause in the remainder of FY19".

"Given the upside risks to inflation, discussed extensively, another policy rate hike can not be ruled out", he said.

Mark Carney, Governor of the Bank of England, said rates would need to rise further to bring inflation back to the 2% target over the next few years, but stressed hikes would be "limited" and "gradual". "The assessment based on the RBI's business expectations index for Q1FY19 remained optimistic notwithstanding some softening in production, order books and exports", the RBI said. 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.


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