Wednesday, 24 October, 2018

Bank of England hikes interest rates to highest level since 2009

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 | 05 August, 2018, 19:44

The central bank hiked interest rates by 25 basis points to 6.5 per cent, in the second such hike in three months.

Economists forecast that the bank's Monetary Policy Committee will raise the rate from 0.50 percent to 0.75 percent, the highest level since March 2009.

"Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent".

"Its a slightly more hawkish rate hike than expected".

Simultaneously, it raised average inflation projection for 2018 second half from 4.7% in June to 4.8%.

With expectations of a rate hike nearly entirely priced into the market, investors are mostly focused on what message the Monetary Policy Committee sends on Thursday about its intentions for further increases in borrowing costs.

He said rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity.

While rates remain low, he said many savings accounts were now offering higher returns than Bank Rate. Bank staff believe this weakness was temporary and expect the economy to expand by 0.4% in the second quarter.

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.

Its rate hike comes as the squeeze on household finances has eased, with wage growth just outstripping inflation, which is helping growth to pick up.

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Bank of England governor Mark Carney has recently begun to speak more positively about the United Kingdom economy again, which led to the 0.25% hike to 0.75% today.

The central bank said that GDP growth rate for the April-June quarter is seen at 7.5-7.6 per cent while maintaining the FY19 growth rate at 7.4 per cent.

And with unemployment at its lowest rate in more than 40 years, it thinks pay increases will continue to pick up, creating inflation pressure.

But some economists have questioned whether the BoE was wise to raise rates with uncertainty surrounding the economy.

The Fed, which is expected to keep rates on hold at a two-day meeting that ends later on Wednesday, has already raised rates twice this year, while the Bank of England is poised to raise rates at a meeting on Thursday.

Why is the Bank raising rates?

The Bank had backed away from a rate rise earlier this year after growth slowed down sharply to 0.2 per cent in the first quarter, but said the economy had recovered as predicted.

"Subsiding consumer and business confidence, especially in forward looking gauges, together with the responses to the Ipsos Mori opinion poll, suggest strongly in our view that private sector economic agents are increasingly and demonstrably not behaving in this way", Wraith concluded.

He said "limited" and "gradual" increases were required to bring inflation down to its 2 per cent target now that the United Kingdom economic growth appeared to be picking up again.

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