Wednesday, 12 December, 2018

RBI increases repo rate by 25 bps to 6.50%, reverse repo unchanged

RBI hikes repo rate by 25 basis points to 6.50% maintains neutral stance RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral
Orlando Vargas | 03 August, 2018, 08:50

"RBI's Monetary Policy Committee has chose to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5% Consequently, the reverse repo rate under the LAF stands adjusted to 6.25% and marginal standing facility rate and Bank Rate to 6.75%", the apex bank said in a statement.

The Bank has been signalling for some time that rates will need to rise to cool inflation, which surged after the Brexit vote sent the pound plunging and still remains above target, at 2.4%. "Policy needs to walk, not run".

What will an increase mean for households?

After the last rate rise in November, half of savings accounts were unchanged.

However the respected Fraser of Allander think tank at Strathclyde University said that, while the increase might suit the United Kingdom as a whole, it was not ideal for Scotland.

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

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

Sellers in control of Sterling as further rate hikes get priced out.

The Reserve Bank today retained the GDP forecast for the current fiscal at 7.4 per cent on robust corporate earnings and buoyant rural demand, though it flagged global trade tensions for Indian exports.

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For loans above Rs 3 million, the revised rate is 8.80 per cent for women borrowers and 8.85 per cent for others.

"But we expect the economy to regain some momentum next year following a soft Brexit outcome, enabling the MPC to raise Bank Rate twice in both 2019 and 2020, exceeding the glacial pace of tightening now priced-in by markets", says Samuel Tombs, Chief UK Economist with Pantheon Macroeconomics.

The BoE said Britain's economy, while growing more slowly than in the past ahead of Brexit, was operating at nearly its "speed limit", or full capacity, raising the prospect of more home-grown inflation pressure ahead.

However, the policy committee signaled that it was in no hurry to raise them further with an uncertain Brexit on the horizon.

It said: "The rise threatens to dampen consumer and business confidence at an already fragile time".

It continued to pencil in growth of 1.7% for 2020.

The BOE decision came a day after the U.S. Federal Reserve reiterated that it will slowly raising borrowing costs, and a week after the European Central Bank kept to its plan to end its bond-buying program this year. "While a quarter-point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty".

Analysts say that the hike will not have a major affect on non-resident Indians (NRIs) in the UAE, except those who are holding floating mortgage rates back in India because most of the existing auto and personal loans are obtained at a fixed rates. The second is that the path to higher rates may undulate. "Either way it is bold move".

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