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

What the interest rates increase means for you

What the interest rates increase means for you

As an internal benchmark or reference rate for banks, the Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum interest rate of a bank below which it can not lend to the loan seekers.

The Bank of England base rate has risen from 0.50 percent to 0.75, today as interest rates rise.

Though the monetary policy statement noted that inflation projections for the second quarter have been revised marginally downwards compared to the June statement, several risk factors persist, including volatile crude oil prices and global financial markets, as well as concerns of fiscal slippage by the Centre or States.

At the close of Bank of England governor Mark Carney's press conference the pound was trading around 0.3% weaker versus the USA dollar at 1.303, according to Bloomberg data.

This initial reaction appears to be correct, but the subsequent selling pressure will certainly have burnt some hands.

The Pound-to-Dollar exchange rate was quoted at a high of 1.3033, but is now down at 1.3032.

Investors are betting there is more than a 90% chance that interest rates will rise to 0.75%.

While any interest rate rises are expected to be "limited and gradual", Mr Carney has warned that "guidance is not a promise of the future path of policy". The UK economy is now in the tenth year of economic recovery and the unemployment rate is at its lowest level for over 40 years.

When policymakers raised interest rates last November, it predicted that savers would reap the benefits of a rate rise more quickly than borrowers would feel the pinch.

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The increase takes the benchmark rate to its highest level since 2009.

Charlotte said: "Today's rate decision is a beacon of hope for savers, who have grown exhausted of the low rates that have plagued them for so long".

However, those with a variable rate mortgage will pay more on their repayments each month.

Another bullish driver for Sterling is the upgrade to forecasts for inflation and growth contained in the Inflation Report.

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.

However, lower-than-expected inflation figures - unchanged at 2.4% in June - and weak wage growth had placed a question mark over the increase for some. Brexit the bigger driver for GBP in the near-term. "We expect RBI's tenor to remain neutral to hawkish".

She continued: "Back in February 2009, the average standard variable rate (SVR) stood at 4.83%, little changed from the average of 4.72% recorded today. So we definitely had the short GBP bias spot on!" says Larsen.

Asked by business presenter Ian King whether the full rate increase would be passed on to savers, Mr Cutter responded: "Yeah, we'll see what the reaction is in the market". Will they honour the 0.5% rate, or will it be revised?

"It is nearly unthinkable that the Bank of England will follow up with further rate rises in the next few months given the risks on the horizon". "We look up at components but we focus on improving the overall headline".

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