Inflation fears force RBI hold key rates

Inflation will be influenced by Britain’s eventual deal with the EU

Inflation will be influenced by Britain’s eventual deal with the EU

On Thursday, the Bank of England (BoE) froze its key interest rate but cautioned that it could rise more quickly than expected so as to bring down high inflation.

RBI saw inflation hardening to 5.1 per cent in the fourth quarter of 2017-18 and further to 5.1-5.6 per cent in the first half of next fiscal.

Bankers and experts are of the view that for the third time in a row, RBI may key repo-rate or short term lending rate unchanged as inflation trajectory is likely to remain upward at a time when crude oil prices in global market has started firming up and government plans to raise crop support price.

The RBI has held the repo at 6.0 percent since a 25 basis point cut in August. It gained 0.3 percent to 88.10 pence per euro, while the yield on United Kingdom 10-year government bonds fell one basis point to 1.54 percent.

The inflation outlook is "clouded by several uncertainties", the committee noted.

The reverse repo rate under the LAF remains at 5.75% and the Bank Rate at 6.25%. "Moreover, it retained the neutral stance of monetary policy and reiterated its commitment toward achieving the medium term inflation target of 4 percent".

"Inflation is still expected to fall back gradually, however the MPC notes some firmness in wage growth and expects that pay growth will rise further in response to a tighter labour market". "There is, therefore, need for vigilance around the evolving scenario in the coming months", the statement said.

In the first half of FY19, the retail print would be in the range of 5.1-5.6 per cent, but might cool to 4.5-4.6 per cent in the second half, it projected. Following the publication of the bank's quarterly Inflation Report alongside its rate decision, Governor Mark Carney hinted that a quarter-point hike in United Kingdom interest rates is now possible as soon as May.

An RBI staff study showed every 100 bps increase in borrowing costs lowers the investment rate by as much as 91 bps, Reuters reported.

"Monetary policy for major central banks are slowly but surely moving towards normalisation", NFS Micro analyst Nick Stamenkovic told AFP.

The Union Budget 2018-19 would stoke demand but worsening public finances may crowd out private funding and investment, the RBI said.

RBI has two challenges to tackle with, one is the transmission of lower interest rates in the economy through banking system so that growth can be incubated at this juncture and second is to protect economy from global interest rates tightening started by USA. The inflation projection is based on the current market expectations on rates, which are higher than in November.

Though prices eased in December, the winter seasonal food price moderation was less than usual, it said.

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