Pre-empting RBI, banks set to raise lending rates

Posted February 10, 2018

The Repo rate is maintained at 6 percent and the reverse repo rate is maintained at 5.75 percent.

Banks are also being forced to raise deposit rates so they can attract more funds, and they continue to set aside more capital as they clear a near-record $147 billion in soured debt.

"Under such circumstances, it is important to help cool off bond yields to protect the overall interest rates from going up and hurting incipient signs of growth".

The Bank's analysts believe investment would be 1.5pc to 2pc higher in the 12 months to June 2018 were it not for Brexit-related uncertainty.

Whilst Governor Carney was reluctant to pinpoint a specific date for the next rate rise, the MPC's May meeting, when it will next update forecasts, seems consistent with signals the BoE offered on Thursday. It now still expects average wage growth to pick up to 3 per cent this year, despite similar forecasts of an uptick frequently being proven wrong in the past.

"It will be likely be necessary to raise interest rates to a limited degree in a gradual process, but somewhat earlier and to a somewhat greater extent than what we had thought in November", Governor Mark Carney said in a press conference following the decision.

"With inflation now at three per cent, well above the MPC's two per cent target, it's inevitable that the Bank of England will consider a further rise in rates to try to curtail the pace of inflation".

Today's release suggests that the bank is considering a hike in May, the next time it releases an Inflation Report.

The Bank of England linked the sluggish British outlook to slower growth in the labour force, due to fewer immigrants coming to Britain after Brexit and to the country's ageing population.

The Bank of England said it expected the economy could only grow by 1.5% a year before it started to generate too much price pressure.

In recent times however, sterling has built up some strong gains against the dollar. Backwards looking indicators (those which take into account actual hard data) are reasonably positive, with the UK's GDP in the fourth quarter growing at 0.5% - better than had been forecast.

"That decoupling was also evident in asset prices".

Growth for the fiscal year 2018-19 was estimated at 7.2 percent - in the range of 7.3-7.4 percent in the first half and 7.1-7.2 percent in the second half.

"The pace of United Kingdom economic growth slowed sharply at the start of the year as January saw a triple whammy of weaker PMI surveys", Chris Williamson, IHS Markit's chief business economist said in a statement. "Sixth, the confluence of domestic fiscal developments and normalisation of monetary policy by major economies could adversely impact financing conditions and undermine the confidence of external investors", the statement said.

"What will be key now is to watch how sterling responds, as a much quicker appreciation could produce a faster fall in inflation and potentially nullify the need for a more rapid tightening cycle".