Interest Rates: What The Rise Means For Your Household

Andrew Cummings
August 3, 2018

The repo rate is basically the rate at which the RBI lends short-term money to all the banks.

In June, three out of nine policymakers, including the Bank's chief economist Andy Haldane, voted for rates to rise to 0.75%.

The Bank of England has surprised foreign exchange markets by voting 9-0 to raise interest rates to 0.75% on Thursday, August 02.

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. It is the first time since October 2013 that the rate has been increased at consecutive policy meetings.

The latest policy decision could translate into higher equated monthly instalments (EMIs) for home, auto and other loans, if the banks pass on the burden to borrowers.

Here's Brooks one last time: "Earlier this year the BOE Governor Mark Carney said that the Bank would give its view on the latest equilibrium, or neutral, interest rate for the United Kingdom economy".

But it will still leave savers who have suffered a decade of miserly interest payments with a poor return on cash left in the bank.

Investec economist George Brown said he is "fairly confident" the Bank will move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter. Pound traders took the rate of future hikes as a bearish sign, sending the GBP/USD sharply lower for Thursday after sending the pair into 1.3125 on reaction to the 25 bps rate hike. These new rates will be communicated to customers and used to calculate mortgage repayments from the start of September.

It is very unlikely and investors certainly do not expect another rise for about a year. "Given this, we have to ensure that we run a tight ship on the risks that we control to maximize the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 percent".

The BoE said it expected Britain's economy would grow by 1.4 percent this year, unchanged from its forecast in May, but it nudged up its forecast for growth in 2019 to 1.8 percent from a previous projection of 1.7 percent. "For people having existing loans most of the personal and auto loans are usually at fixed rates, hence the biggest impact comes to mortgage loans". "Pre-payments made in the first half have vast impact in reducing your long-term interest outgo and thus ensuring savings".

EUR/GBP at 0.90 gives a GBP/EUR exchange rate of 1.11. The commercial banks borrow funds only if they witness a shortfall in their funds. However, with peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, Kapoor expects a pause in the remainder of FY19.

The decision to raise rates will be a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5% or below since 2009.

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