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What does interest rate rise mean for mortgages and savings?

03 August, 2018, 11:56 | Author: Melinda Barton
  • RBI rate hike worries real estate sector

The Bank of England raised its interest rate by 25 basis points to 0.75% Thursday, marking only the second increase in Bank Rate since the financial crisis, but also a second within the past year.

The Monetary Policy Committee, MPC, of the Reserve Bank of India today hiked repo rate by 25 basis points to 6.50 per cent in its third bi-monthly monetary policy review of 2018-19. The reverse repo rate was also raised by 25 basis points, to 6.25 percent.

Traders said though the market was largely prepared for a rate hike on Wednesday, yields would still shoot up by 5-10 basis points after one, and the surge would be much more if the RBI also tightens its stance. With the new hike, home loans and EMIs are expected to become costlier. "While the tentative calm in the financial markets provides the RBI with the time and space to keep rates on hold, a pre-emptive move is preferable".

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

The minutes explained that Brexit is still one of the most important considerations for the bank's rate-setting committee.

"Every saver now has their fingers crossed that this latest base rate rise may go some way to returning rates to those levels, but like last time, providers are likely to be slow to react and choosy with their increases". He said: "Its been a problem for decades that the banks always pass the pain onto savers but not the benefits". This is the second time in a row that the RBI has hiked its key lending rate.

He said: "We believe that the odds still favour the Bank of England lifting interest rate from 0.50% to 0.75% on Thursday after the August MPC meeting - most likely following a split vote". Sterling will follow these discussions - and the prevailing sentiment remains negative - now that monetary policy influence is pushed further into the future.

"Equity markets will take the rate hike in stride pending additional data; generally, it takes at least three hikes in a rate-hike cycle for the impacts to start to be felt by consumers and businesses", points out Sunil Sharma, chief investment officer, Sanctum Wealth Management.

It's previous rate rise, to 0.5%, came in November 2017. "Although underlying tone of RBI statement appeared balanced, inflationary risks and outlook highlighted by the central bank indicates hawkishness. This policy's current rate hike was already factored into our evaluation of deposit rates and there would no such immediate reaction to it", said Rajeev Ahuja, executive director, RBL Bank.

The Bank kept its forecast for United Kingdom growth unchanged at 1.4 per cent for 2018, but upped its prediction to 1.8 per cent after Brexit in 2019.

The forecasts see inflation slipping to 2.2 per cent in 2019 from an average of 2.3 per cent this year before settling at the goal in 2020.


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