Monetary Policy: RBI Hikes Interest Rates Again; Loans To Get Costlier

Monetary Policy: RBI Hikes Interest Rates Again; Loans To Get Costlier

The Reserve Bank of India (RBI) on Wednesday announced a second straight 25 basis points hike in repo rate to 6.5 per cent.

According to this prediction, the only vote against would come from Sir Jon Cunliffe, the current Deputy Governor of the Bank of England for Financial Stability. Inflation is now expected to rise to 2.5 per cent in the next quarter before falling to 2.2 per cent in 2019, and 2.1 per cent a year later - all a percentage point above previous forecasts.

But, in the past banks have been slow to pass on the rise - or just raise it below the full increase.

But the message for interest rates remained one of gradual and limited increases as the central bank saw inflation only a fraction above its 2 percent target over the next few years.

The rate setters went for a rise, taking the base rate to 0.75pc, marking only the second rate hike in a decade.

The Brexit negotiations and uncertainty over the deal - and indeed, any deal - being in place by the UK's withdrawal from the European Union next March casts a cloud over the outlook for the economy and rates.

On growth outlook, the central bank said various indicators suggest that economic activity has continued to be strong.

Five of the six members on the rate panel voted for a rate increase, Reuters reported.

The hike in repo rate, the second time in two months, will have a direct bearing on home and auto loans.

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Within the announcement, the Bank of England made clear that it stands ready to continue the normalization of monetary policy.

The biggest anxiety in everyone's mind today is whether the ongoing rate hike cycle is likely to be a shallow one?

It provided an estimate of the "trend real interest rate", what it calls R*.

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".

That said, Threadneedle Street has been overestimating wage inflation for years, and former MPC member and labour market expert, David Blanchflower, says it is still doing so.

The decision to raise interest rates, which represents the cost someone pays for the use of someone else's money, will be welcomed by savers who have seen very small returns on deposits in the last 10 years.

Sixty percent of the economists polled believed that there may be a 25 basis points (bps) rate hike, while the remaining expected a status quo.

Market interest rates used for the Bank's forecasts imply bank rate will rise to 1.1 per cent by the third quarter of 2021, slightly lower than the 1.2 per cent implied in May.