RBI hikes repo rates by 25 basis points

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A day after inflation-spooked RBI went for the second straight interest rate hike, markets are showing greenshoots of worry. The apex bank has, however, retained its "neutral" stance.

Borrowers not on fixed-rate interest are likely to see an increase in their loan repayments, but the lender has to legally give you notice in order to do this, subject to the terms and conditions of your account.

The British Chambers of Commerce and the Institute of Directors, who between them have 100,000 members and represent more than seven million employees, said that the decision to move interest rates to above 0.5 per cent for the first time since March 2009 was a mistake. "We do feel the balances of risks are for further political turbulence between now and October".

For the second consecutive time, the six-member MPC headed by RBI Governor Urjit Patel has hiked the key policy repo rate by 25 basis points.

The projected inflation rate is above its targeted comfort level of 4 per cent. It is now at 2.4%, down from 3% in January 2018.

Minutes of the Bank's rate meeting signalled there would also be further rises to come as policymakers look to bring inflation back to target, although they continued to stress that these would be "gradual" and "limited".

Above: The initial reaction by Sterling was to shoot higher, but a sudden change in heart by the market left it nursing losses.

"The proportion of respondents viewing the European Union and Brexit as one of the most important concerns facing the United Kingdom shot up from 46% to 58% in July, the highest reading in the history of the index which dates back to 1974".

Does this mean the economy is firing on all cylinders again?

The increase puts rates at their highest for nearly a decade.

The Royal Bank of Scotland and NatWest passed on the rise to mortgage customers immediately, as did the Skipton Building Society and Santander.

He said: "Rates can be expected to rise gradually. The average five-year fixed rate has also grown, rising by 0.16% to stand at 2.15% today".

Mr Carney said work had been ongoing to ensure that the financial system was in a "robust position" so it "lessens the impact of a bad deal in this case, a no-deal Brexit".

"We have pencilled in a 1.27-1.28 trough for GBP/USD to reflect peak "no deal" Brexit risks (EUR/GBP risks moving up to 0.91-0.92)".

The pound nudged higher after the decision, trading broadly flat against the dollar at $1.3111. This is slightly lower than the 2.5% rate expected by the Bank in its forecast three months ago. "If they'd held their nerve back then, rates might have been 1% or more by now, and policymakers' jobs would be somewhat easier today".

Gregory's forecast is for the UK's main interest rate to sit at 1.5% by the end of 2019 and 1.75% by the time the curtain closes on 2020.

The BoE said Britain's economy, while growing more slowly than in the past ahead of Brexit, was operating at nearly its "speed limit", or full capacity, raising the prospect of more home-grown inflation pressure ahead.

However, just like the rise in November, providers are likely to be selective with the rates they choose to increase.

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