Bank of England poised to raise interest rates

  • Bank of England poised to raise interest rates

Bank of England poised to raise interest rates

On liquidity in the financial system, RBI deputy governor Viral Acharya in a media briefing after the central bank hiked the repo rate said: "Though the growth in currency-in-circulation has moderated to some extent recently, its expansion remains above the historical trend".

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.

Several economists have challenged the need for a rate hike now, given not only the Brexit risks but also the potential damper on global growth from U.S. President Donald Trump's tariffs on imports, and counter-moves by other countries.

The MPC noted that retail inflation, measured by the year-on-year change in the CPI, rose from 4.9 per cent in May to five per cent in June, driven by an uptick in fuel inflation.

"And we took two steps - once in June and once in August - to maximise our chances that we don't drift away from four per cent and in fact move towards four per cent on a more durable basis", said RBI governor Urjit Patel.

"We are expecting at least one more hike this financial year", said Anagha Deodhar, economist, ICICI Securities.

The hike will make United Kingdom mortgages and loans more expensive, but should boost returns on cash tucked away in domestic savings accounts.

Toni Smith, COO at PRIMIS and PTFS, said: "After months of speculation, the inevitable has finally happened - and only time will tell if this is the first of many increases to come or if - with Brexit on the horizon - the Bank of England may choose to reduce them once again". Accordingly, the Marginal Standing Facility rate and the Bank Rate too stand adjusted at 6.75 per cent. After delivering the first back-to-back rate increase since it was set up in September 2016, the MPC warned that "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".

Higher rates make loans slightly more expensive, weighing on some mortgage holders and businesses looking for credit to invest.

Jon Osterl, UK CEO at finder.com: "It's particularly good news for savers, who have suffered ultra-low interest rates for the past decade. The likely impact of recent hikes in the minimum support price (MSP) of agricultural products on inflation has, probably, also influenced the committee's decision to pro-actively hike interest rates".

"Scotland's growth over the last three years has lagged behind the United Kingdom, so whilst the Bank may judge that the United Kingdom economy is in sufficiently robust health to cope with a rate hike, a rate rise in Scotland may be more of a challenge".

Millions of borrowers on variable rate mortgages will be affected by the decision, with a quarter-point rise adding around £16 a month or £192 a year to the average mortgage.

"They can expect a rise to their savings, albeit a small one".