Published: Thu, August 02, 2018
Markets | By Otis Pena

Bank of England raises interest rates to 0.75%

On Wednesday, Union Bank of India raised its one-year MCLR by 10 basis points to 8.55 per cent while Kotak Mahindra Bank raised its one-month and three-month rates by 5 basis points to 8.20 per cent and 8.55 per cent, respectively.

Five of the six members on the panel voted for a rate increase in the latest policy review.

"The main reason for changing the policy rate is to ensure that, on a durable basis, we come to and maintain the 4 per cent (inflation) target". 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.

Last May, the Bank backed off from a widely anticipated rates hike to wait and see how the economy recovered after slow start of 2018.

In June, the RBI had raised the repo rate by 0.25 percent to 6.25 percent.

The RBI's policy statement also mentioned that minimum support price (MSP) hike as the primary factor stoking inflation this year.

"The swiftness with which the central bank has responded to the jump in inflation should prevent the need for very aggressive policy changes in the future", Capital Economics analyst Shilan Shah said in a note.

RBI Governor Urjit Patel at the third bi-monthly monetary policy press conference.

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The RBI has projected the inflation at 4.6 per cent in Q2, 4.8% in H2 of 2018-19 and 5.0% in Q1 of 2019-20 "with risks evenly balanced".

The hike in repo rate will fuel the marginal cost based lending rate (MCLR), which has already being moving upwards as many banks have been increasing their MCLR.

On the growth outlook, the MPC said the progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops is expected to boost rural demand by raising farmers' income.

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

Since RBI can not ignore threats from trade tensions between the USA and China and volatile financial markets, it has maintained the neutral policy stance.

He said: "We believe that the odds still favour the Bank of England lifting interest rate from 0.50 percent to 0.75 percent on Thursday after the August MPC meeting - most likely following a split vote".

Adjusted for the BoE's inflation target, this would imply Bank Rate of 2-3 percent to keep growth and inflation rates stable when the economy is running at full capacity.

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