Loans to get costlier as RBI hikes repo rate again

RBI hikes repo rate by 25 basis points to 6.50% maintains neutral stance

Members of nine-strong Monetary Policy Committee (MPC) are predicted to increase rates from 0.5% to 0.75% in what would mark only the second rise since the financial crisis struck, following last November's quarter point hike.

High volatility in crude oil prices, turbulence in global financial markets, hardening of inflation expectations, and inputs pressures faced by corporations domestically, prompted the Reserve Bank of India to up the repo rate by 25 basis points to 6.50 per cent on Wednesday.

For the second consecutive time, the six-member MPC headed by RBI Governor Urjit Patel has hiked the key policy repo rate by 25 basis points.

Similarly, the reverse repo rate, at which it borrows from banks, was also raised by a similar proportion to 6.25 per cent.

Mr Carney said the "modest" rise in interest rates was an appropriate response to inflation which is still rising faster than its two per cent target.

Deposit rates might rise by about 10 bps this quarter, said bankers.

So there is no direct link to the Bank rate.

An increase in base rate should provide a boost to savers as banks pass on the higher rate through interest paid on accounts, while borrowers can expect to pay more for mortgages and loans as a result.

In its statement on Thursday, the central bank said it saw "tentative signs that actual and prospective protectionist policies were starting to have an adverse impact" on global trade. Out of 53 economists polled by Bloomberg, 40 had forecast hike in rates.

The apex bank has, however, retained its "neutral" stance. "The BoE has signalled in the past that a conventional horizon is typically two years not three".

"Pay rises are only just managing to outpace inflation, so this increase is likely to do little to encourage consumer confidence among the millions of Britons with variable rate mortgages".

Image copyright Getty Images Luis asks: What is the reason for increasing interest rates when the economy has a slowdown?

The third-quarter 2018 inflation forecast is raised from 2.4% to 2.5% while the third-quarter 2019 inflation forecast is raised from 2.1% to 2.2%.

In the shorter term, the Bank Rate implied by a so-called equilibrium real interest rate, or "r*", was likely to be somewhat lower, the BoE said but it did not give an estimate. "We therefore continue to expect the BoE to hike by more than the market had priced in before the August Inflation Report today".

However, the BoE continued to stress that Britain's economy was at risk of too much inflation even with its slow growth.

This is calculated using the March inflation rate, and changes in September.

SNP economy spokesperson Kirsty Blackman MP added: "The hike in interest rates will deliver a further blow to the living costs and standards of millions of families across the United Kingdom, who are already feeling the squeeze as prices rise too fast".

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