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India’s central bank raises interest rate to fight inflation

05 August, 2018, 19:47 | Author: Melinda Barton
  • RBI snip 2

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.

Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates n Wednesday, while 22 said the next hike would come later this year, or early in 2019.

SNP economy spokesperson Kirsty Blackman MP added: "The hike in interest rates will deliver a further blow to the living costs and standards of millions of families across the United Kingdom, who are already feeling the squeeze as prices rise too fast". While inflation projection for the second half of 2018-19 fiscal year was raised to 4.8 per cent from 4.7 per cent, FY19 growth projection was retained at 7.4 per cent. That pushes up the price of imported goods, fueling inflation.

Mark Carney: "What banks pay (.) in terms of returns, partly depends on what it costs them to borrow in global markets, and that had been very low at the time of the last rate increase".

How many more rate rises can we expect?

Markets will mainly focus on comments following that decision from Bank Governor Mark Carney, especially as to whether this marks the start of a series of tightening moves.

In the minutes of the MPC's meeting, the Bank said: "Recent data appeared to confirm that the dip in United Kingdom output in the first quarter had been temporary, with momentum recovering in the second quarter".

Here's Brooks one last time: "Earlier this year the BOE Governor Mark Carney said that the Bank would give its view on the latest equilibrium, or neutral, interest rate for the United Kingdom economy".


This will have some direct moderating impact on inflation, provided there is a pass-through of reduced GST rates to retail consumers, it added. Accordingly, the Marginal Standing Facility rate and the Bank Rate too stand adjusted at 6.75 per cent.

But Mr Carney and the MPC have been careful to stress repeatedly that any rises will be "gradual" and "limited" and not see rates increase to the high levels seen in the past.

However, after the last rate rise in November, half of savings accounts did not move at all. However, the MPC being headed by RBI Governor Urijit Patel has kept their stance neutral.

The pound slid as much as 0.9 per cent and was down 0.5 per cent at US$1.3063 as of 2:55 p.m. London time.

Patel said that given such an external environment, the central bank has to run a tight ship on the risks it can control to maximise the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 per cent.

"Guidance and communication from the MPC over recent months, and in particular the lack of any attempt to rein in the ever higher market-implied probability of a 25bp hike, suggests a majority of members are set to vote for a hike on Thursday", he said.

While acknowledging that geopolitical tensions and elevated oil prices continue to be sources of risk to global growth, the RBI was confident that domestic economic recovery was well entrenched.

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