MPC raises Bank Rate to 0.75%

Gladys Abbott
August 5, 2018

Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to raise the base rate from 0.5 per cent to 0.75 per cent.

FOR the second time in as many months, RBI on Wednesday raised the key interest rate by 0.25 per cent to the highest level in two years as it battled inflation without looking to harm growth, but the move may result in costlier home, auto and other loans.

Governor Mark Carney and the other eight members of the bank's rate setting Monetary Policy Committee have been signalling that a hike is likely to come at some point in 2018 since their last hike in November a year ago, and Thursday looks like the day it will happen.

Similarly, the BoE's new inflation forecasts will be watched as a sign of whether it thinks investors are being too relaxed by betting on no follow-up rate hike until late 2019 and only one more nearly at the end of its three-year forecast period.

In terms of inflation, RBI said, it is projected at 4.6 per cent in second quarter, and 4.8 per cent in the second half of 2018-19.

How many more rate rises can we expect?

The rate they decide sets a reference point for banks and building societies, so their decision affects millions of people across the UK.

In its meeting, the MPC agreed that the economic dip in the first quarter was temporary, with momentum recovering in Q2.

The influential think tank said: "The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions". The Bank of England will continue to signal that rate hikes will be needed but that won't happen in November or February.

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This the 1st time since October 2013 that repo rate has been hiked at 2 consecutive RBI policy meetings.

Sir Dave Ramsden, one of the Bank's deputy governors, warned savers "never" to expect banks and building societies to fully pass on rate rises.

"The labour market has continued to tighten and unit labour cost growth has firmed".

Institute director Professor Graeme Roy said: "The interest rate rise - to the highest rate since 2009 - marks an important milestone in the UK's recovery from the financial crisis".

He said "limited" and "gradual" increases were required to bring inflation down to its 2 per cent target now that the United Kingdom economic growth appeared to be picking up again.

In theory, an interest rate rise is good news for savers, who should see a higher return for their investment.

"Subsiding consumer and business confidence, especially in forward looking gauges, together with the responses to the Ipsos Mori opinion poll, suggest strongly in our view that private sector economic agents are increasingly and demonstrably not behaving in this way", Wraith concluded.

Ben Brettell, senior economist at Hargreaves Lansdown, commented: "The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits".

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