Bank of England raises key interest rate

RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral

On RBI monetary policy action, Garg said it speaks about growth remaining unchanged.

The monetary policy committee of the central bank, which determines the policy interest rate cited inflation concerns for its decision but retained its "neutral" stance. RBI had last raised the repo rate June 6 by 0.25 per cent to 6.25 per cent.

The six-member Monetary Policy Committee headed by RBI Governor Urjit Patel kept its stance at neutral.

Indian Banks Association's chairman (officiating), Shyam Srinivasan, said though there are several risk factors to growth which could tilt on either side, the RBI has not only maintained the growth projection of 7.4 per cent for this fiscal, but also projected a higher rate of 7.5 per cent for the first quarter of next year as well.

Overall inflation rate rose from 4.5% to 4.6% between May and June, while retail inflation edged up to 5% - significantly higher than the bank's 4% target.

In the last review, inflation for 2018-19 was projected at 4.8-4.9 per cent in the first half and 4.7 per cent in the second half, including the HRA impact for central government employees, with risks tilted to the upside.

"The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits".

"Longer term fixed rates are likely to be more popular now among borrowers as they try to protect themselves from future base rate rises".

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Suren Thiru, head of economics at the British Chambers of Commerce, said: "The decision to raise interest rates looks ill-judged against a backdrop of a sluggish economy".

"While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt", said Richard Haymes, head of financial difficulties at credit data firm TDX Group.

Carney, who had argued that a slump in growth in the first quarter would prove temporary, said it would be wrong to be put too much emphasis on unknowns.

"The impact of the rate hike will be seen with a lag effect, giving the RBI time to decide on the next course of action", he added.

"That will then force the banks to push through the bank rate rise".

Its rate hike comes as the squeeze on household finances has eased, with wage growth just outstripping inflation, which is helping growth to pick up. Core inflation - which strips out volatile food, fuel and light prices - has been sticky at a four-year high of more than 6 per cent, indicating demand pressures in the economy.

The MPC said 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".

Hinting at sticking to the deficit targets, Patel said, "We do have things that are in our favour, which you're aware of, and if we continue along that path, we ensure that we don't add to the global risk profile that would adversely affect us".

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