Amid rising inflation in the United Kingdom due to the Russia-Ukraine war, the monetary policy committee of the Bank of India has voted for an increase in the base rate. The rate of rise is 25 basis points to 0.75 percent and this is the highest level in the past two years. The last highest level was in March 2020
The committee stated inflation may reach a peak this month at about 7.25 percent as commodity prices are on the rise due to disruption in the supply chain. It is further expected that inflation may rise to 8 percent in the second quarter of 2022. If the war continues longer, the inflation may rise further later this year.
Consumer confidence is on the downside due to squeezed disposable incomes of households and this is leading to a low GDP in the country. The cost of living is rising and it is piling pressure on the finances of individuals. This may turn up bad for borrowers.
It is being expected the bank rate may touch 2 percent by the year-end and the current rise in basis points is paving the path to it. The current mortgage rate is higher compared to six months ago and it is believed a further rise is on the card.
The fixed rates for five-year tenure were at the lowest level at 0.91 percent in December 2021. The current rate is low too and one can be lucky to find it under 2 percent. The rates are now at historic lows. However, an upward trajectory is expected for mortgage rates.
The Russia-Ukraine war started on February 24 when Russia invaded the country. The Western allies, the United Kingdom and the European Union imposed several sanctions on Russia including a ban on the imports of oil and gas. Europe relies on Russia for energy imports and the ban has led to a shortage in supply. This has accelerated the prices of food and other necessary items. As an aftermath, several countries are facing rising inflation.
Simultaneously, the Russian banks have been removed from the international SWIFT payment system to bar sending money to Russia. China has criticized the move.
The war has continued for about two months and most cities and towns of Ukraine have been completely destroyed by Russian tanks, troops and missiles. The United States and NATO have avoided a direct fight with Russia on the Ukraine ground citing the move may lead to the third world war.
Meanwhile, several peace talks between the delegates of Russia and Ukraine have ended without any solution.