GBP Slumping After ’One and Done’ BoE Rate Hike

Fredrick Soto
August 3, 2018

The rate action was in line with a Reuters poll last week, which showed 37 of 63 economists expecting a rate increase.

The Reserve Bank of India (RBI) today hiked the repo rates, or interest rates at which the country's central bank lends money to banks.

The latest policy decision could translate into higher equated monthly instalments (EMIs) for home, auto and other loans, if the banks pass on the burden to borrowers.

Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, said: "With the vast number of lenders increasing rates in the lead up to May's rate announcement, providers have chosen to keep rates relatively static in the run-up to this one, having already been prepped for a rise".

'Rates can be expected to rise gradually.

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

The Bank of England raised its benchmark rate to 0.75% from 0.5% despite worries over the strength of the United Kingdom economy and uncertainty over Brexit. That was a fraction lower than a projection of rates of 1.2 percent the last time the BoE published forecasts for the economy in May. Upside risks to inflation remain on account of crude oil price rise, volatility in global financial markets, rise in households' inflation expectations, higher-than-average hike in MSPs for Kharif crops, and fiscal slippage both at Centre and state levels.

The BoE signalled it was in no hurry to raise interest rates further as Brexit approaches.

Surendra Hiranandani, chairman and managing director of House of Hiranandani, said inflation is expected to trend upwards and might surprise in the second half of the year owing to increase in higher government spending.

Sterling fell to a one-week low against the U.S. dollar on Thursday, paring back initial gains following the announcement of a 0.25 percentage point interest rate hike. For the RBI, inflation is the central concern.

"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.

"Scotland's growth over the last three years has lagged behind the United Kingdom, so whilst the Bank may judge that the United Kingdom economy is in sufficiently robust health to cope with a rate hike, a rate rise in Scotland may be more of a challenge".

But it also said inflation - now running at 2.4 per cent - was set to rise slightly higher than it had predicted in May's set of forecasts after recent falls in the value of the pound and higher energy prices.

In its accompanying quarterly inflation report, the Bank kept its forecast for growth this year unchanged at 1.4 per cent, but increased the outlook for 2019 to 1.8% from the 1.7 per cent previously predicted.

At the end of 2017, 1.3 million mortgages were trackers and 1.8 million were standard variable rates (SVRs).

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