Homebuyers’ pain as Bank nudges loan rate up to 0.75%

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The Reserve Bank of India (RBI) on Wednesday announced a 25 basis points hike in repo rate to 6.5 per cent. Earlier in June, the Central bank had hiked the interest rates by 25 basis points.

While savers may be hoping for better returns, Bank of England statistics show that the average interest rate on United Kingdom current accounts increased by only 0.09% in the seven months since rates were increased by 0.25% past year.

The Bank of England has raised interest rates to their highest level in nearly a decade but what are the effects of an interest rate increase on day-to-day finances?

The central bank said that GDP growth rate for the April-June quarter is seen at 7.5-7.6 per cent while maintaining the FY19 growth rate at 7.4 per cent.

The Bank's monetary policy committee judged the economy could withstand higher interest rates, which it believes are required to curb persistently high inflation above its 2% target set by the government.

Ashwin Sheth, chairman and managing director, Ashwin Sheth Group said, "While this decision was taken to contain inflation, a rate cut at this stage would have offered some respite".

One of them (a private sector bank) is mired in a huge controversy relating to governance and conflict of interest.

And at 0.75%, rates would still be very low by historical standards, given that the base rate stood at more than 5% when the credit crisis and subsequent global financial crisis hit.

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Lloyds said: 'The 0.25 per cent Bank of England base rate increase will form part of the ongoing rate reviews across our product ranges'.

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.

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

In theory, an interest rate rise is good news for savers, who should see a higher return for their investment. "We therefore continue to expect the BoE to hike by more than the market had priced in before the August Inflation Report today".

"However, with earnings growth remaining weak, the's increase has the potential to weaken consumer spending and dampen growth". "The BoE has signalled in the past that a conventional horizon is typically two years not three". Nearly all (96%) of new mortgage loans are offered on a fixed rate, usually for the first two or five years. "Given this, we have to ensure that we run a tight ship on the risks that we control to maximize the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 percent".

Borrowers not on fixed-rate interest are likely to see an increase in their loan repayments, but the lender has to legally give you notice in order to do this, subject to the terms and conditions of your account.

This has driven the prices of fuel - the biggest item on India's import bill - to record highs at a time the rupee is testing new life lows, raising the threat of imported inflation.

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