RBI hikes repo rates by 25 basis points

RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral

Mumbai: The Reserve Bank for the second time in two months Wednesday raised its benchmark interest rate by 25 basis points on inflationary concerns, a move that will make home, auto and other loans expensive.

Neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

"Based on an assessment., inflation is projected at 4.6 per cent in Q2, 4.8 per cent in second half (H2) of 2018-19 and 5 per cent in Q1:2019-20, with risks evenly balanced", RBI said.

The forecast was based on bets by investors who only expect another rate hike in late 2019 or early 2020 with Bank Rate creeping up to 1.1 percent in late 2020.

The statement issued after three-day meeting of the Monetary Policy Committee (MPC) noted that the progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers' income.

Impact on Bank Fixed Deposits With an increase in policy rates, bank deposit rates are expected to rise as well.

The 10 year-GSec yields have declined from 7.92 percent to 7.78 percent during June 6- July 27.

"It's very unlikely that the conditions over the next six to eight months will warrant another move in monetary policy", said Dean Turner, U.K. economist at UBS Wealth Management. "The trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars".

The rate hike is set to be one of the most divisive decisions in recent bank history, with opinions split on whether or not increasing borrowing costs will be a good idea going forward.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says: "Today's decision by the Bank of England to raise interest rates above 0.5% for the first time since the financial crisis is a symbolic one".

SNP economy spokesperson Kirsty Blackman MP added: "The hike in interest rates will deliver a further blow to the living costs and standards of millions of families across the United Kingdom, who are already feeling the squeeze as prices rise too fast". 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.

It also stated that any future increases in the Bank Rate are likely to be at a gradual pace and to a limited extent. However it chose to pre-empt inflation by hiking the rates by another 25 basis points ahead of the inflation risks actually manifesting itself.

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. He added that this would now obviate the chances of another hike in October.

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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