Monetary Policy: RBI Hikes Interest Rates Again; Loans To Get Costlier

Monetary Policy: RBI Hikes Interest Rates Again; Loans To Get Costlier

Andrew Cummings
August 2, 2018

Markets are pricing a more than 90% chance of a hike but UBS strategist John Wraith says a hike on Thursday is an "unnecessary risk".

The move brings interest rates to their highest level since March 2009, when they were slashed from 1% to the emergency low of 0.5% in an effort to contain the fall-out from the financial crisis.

While savers may be hoping for better returns, Bank of England statistics show that the average interest rate on United Kingdom current accounts increased by only 0.09% in the seven months since rates were increased by 0.25% a year ago. The reverse repo rate has been hiked to 6.25%, the RBI announced after its three-day Monetary Policy Committee (MPC) meeting.

All tracker mortgage products linked to the base rate, including Santander's follow-on rate, will move in line with the change. However, HSBC confirmed it will apply higher rates from tomorrow.

Carney and his team's problem is that markets are now so convinced that a rate hike is coming, that the committee's credibility would be under threat if it were to leave rates on hold.

Indonesia's central bank has been the most aggressive in Asia this year, hiking its benchmark rate 100 basis points between mid-May and the end of June.

Ben Brettell, senior economist at Hargreaves Lansdown, commented: "The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits".

"Even as inflation projections for Q2 have been revised marginally downwards vis-a-vis the June statement, projections for Q3 onwards remain broadly unchanged, RBI said".

The Bank said retail sales had surged by 2.1% in the second quarter, boosted by the recent sunny weather. He called it an "unnecessary risk" in a note sent to clients this week.

The British economy could be summed up as average. The RBI aims to keep consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth. The number of people in jobs is at a record high. 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.

While any interest rate rises are expected to be "limited and gradual", Mr Carney has warned that "guidance is not a promise of the future path of policy".

"It has always been the MPC's explicit assumption that "households and companies (will) base their decisions on the expectation of a smooth adjustment to new trading arrangements", he said.

The central bank also said indicators suggested that economic activity continued to be strong.

The next meeting of the MPC is scheduled from October 3 to 5, 2018.

Speaking in November, he said: "Clearly it's a competitive market, banks are competing for savers and what I'd encourage savers to do is to look at the market, use that competitive pressure and if their bank is not offering them the increase then look for another back that is".

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