Bank of England Raises Interest Rates to Highest Level Since 2009

Aug 03, 2018, 08:46
Bank of England Raises Interest Rates to Highest Level Since 2009

High volatility in crude oil prices, turbulence in global financial markets, hardening of inflation expectations, and inputs pressures faced by corporations domestically, prompted the Reserve Bank of India to up the repo rate by 25 basis points to 6.50 per cent on Wednesday. Households can expect the cost of their loans and mortgages to go up as banks and lenders lift their own interest rates.

Sterling fell to a one-week low against the U.S. dollar on Thursday, paring back initial gains following the announcement of a 0.25 percentage point interest rate hike.

Sentance, a long-time critic of the Bank's ultra-low interest rate policy, adds businesses and consumers should be able to adapt to a well-communicated and gradual series of interest rate rises, after almost a decade of exceptionally low borrowing costs.

The Bank of England pushed interest rates above their financial crisis lows on Thursday, but signalled it was in no hurry to raise them further as Britain heads for Brexit next year with no clear plan for leaving the European Union. With the new hike, home loans and EMIs are expected to become costlier.

"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".

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

"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". In a rising rate scenario, it makes huge sense for customers repaying loans to make periodic principal pre-payments. "Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year's first quarter".

And by predicting gradual increases in the future, the Bank of England also gives itself some flexibility in terms of which way the next move might be.

All loans to United Kingdom businesses linked to the base rate will move in line with the change and in accordance with the terms of the deal.

Yorkshire Building Society - A spokeswoman for the Yorkshire said: 'We will take time to consider how to adjust our variable rate mortgage and saving accounts. "Pre-payments made in the first half have huge impact in reducing your long-term interest outgo and thus ensuring savings".

V S Parthasarathy, chief financial officer, Mahindra Group: The rate hike should help temper inflation and hopefully provide a support to the Rupee. In other words: when inflation is steady at the Bank's 2% target and the economy is running at its maximum speed limit. The reserve repo rate is the rate at which RBI borrows money from commercial banks. However, with peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, Kapoor expects a pause in the remainder of FY19.

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