RBI Hikes Repo Rate to 6.5%

RBI snip 2

RBI Hikes Repo Rate to 6.5%

It may be noted that many banks including State Bank of India have selectively increased their interest rate on fixed deposits, which is likely to increase their lending rates. The reverse repo rate was also raised by 25 basis points, to 6.25 percent. This will affect EMIs of housing and automobile loans for consumers.

If this happens, then borrowing from banks can prove to be expensive for you. It held rates steady on Wednesday, but current plans involve at least two more hikes this year.

The UK economy expanded by just 0.2% in the first three months of the year.

The increase was only the second in more than 10 years, following a hike in November.

5 out of 6 MPC members voted for a hike.

I'm a saver or a borrower - what does it mean for me?

Economists polled by Reuters had mostly expected a 7-2 vote in favour of raising rates. The MPC's rate rise is a reference point for banks and building societies, meaning they can decide how much they change the rate for savers.

In reality, however, it's not so simple.

Mark Carney's press conference will also be of interest, particularly if the governor provides an update on the equilibrium rate of United Kingdom interest rates.

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The Bank had backed away from a rate rise earlier this year after growth slowed down sharply to 0.2% in the first quarter, but said the economy had recovered as predicted. Nearly all (96%) of new mortgage loans are offered on a fixed rate, usually for the first two or five years. That figure is now 90% for new mortgages, and two-thirds of all home loans. The following hike by the RBI comes after it had raised the repo rate for the first time in four years to 6.25%.

However the MPC says it "continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of European Union withdrawal".

And with unemployment at its lowest rate in more than 40 years, it thinks pay increases will continue to pick up, creating inflation pressure. 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.

On Thursday, the Bank will provide an indication of the level of the rate we should expect in normal times.

The government has mandated the Reserve Bank to keep inflation at 4% (+/- 2%).

Of course, these are not normal times.

"Those with tracker mortgages will see them increase automatically and those on variable rates are likely to have any increase passed on in the coming weeks".

"It's very unlikely that the conditions over the next six to eight months will warrant another move in monetary policy", said Dean Turner, U.K. economist at UBS Wealth Management.

In short, guidance is good, but not gospel - and all bets are off in the event of a Brexit shock.

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