Bank of England raises interest rates to 0.75%

Roman Schwartz
August 5, 2018

Governor Urjit Patel attends a news conference after a monetary policy review in Mumbai, India, August 1, 2018.

The RBI said, "On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent".

Five of the six members of the monetary policy committee voted to raise the repurchase rate by 25 basis points to 6.5 per cent, with Ravindra Dholakia the only one opposing it, the Reserve Bank of India said in a statement today. The following hike in the repo rate at two consecutive policy meetings by the central bank comes after the hikes it had made in October 2013.

Retail inflation in India touched the 5 per cent mark in June, compared to 4.87 per cent in May and has gone beyond the RBI's revised inflation projection of 4.8-4.9 per cent for the first half of the current fiscal. Unemployment is at its lowest level since the 1970s, wages are rising and inflation is above the bank's 2 per cent target, at 2.4 per cent.

The increase was only the second in more than 10 years, following a hike in November.

"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 central bank said inflation in two years' time was likely to be 2.09 percent, above the BoE's 2 percent target.

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The National Institute of Economic and Social Research (Niesr) warned on Wednesday that the Bank should raise interest rates on Thursday, but "stand ready" to reverse the hike if circumstances change.

The Central Government has auctioned Cash Management Bills (CMBs) amounting to Rs 65,000 crores since the last monetary policy ( i.e. after June 6, 2018), indicative of liquidity pressures.

The move came as no surprise as the markets were pricing in a 91% chance of a rate hike, but it does come in the face of weak and fragile United Kingdom economic growth figures.

Kathleen Brooks said that one of the main things to look for will be the "mechanics of the rate decision", particularly with regard to how the vote goes in terms of who votes for what.

Ian Stewart, chief economist at Deloitte, said: "The Bank has so clearly telegraphed this rate rise that markets would have been shocked had rates been left on hold". This affects 3.5 million households in the United Kingdom who are on a standard variable or tracker rate mortgage, meaning someone paying a £200,000 mortgage will pay around £300 extra a year - that's £25 more a month.

The repo rate is the rate at which the central bank of the country lends funds to the commercial banks. To add to that is the geopolitical tensions and elevated oil prices which can result in higher inflation.

Sterling, trading at $1.3081 before the rate rise was announced, rose to $1.3129, down 0.1 percent on the day against a broadly stronger dollar.

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