Interest Rates Current Affairs - 2020

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Retail Inflation at 5-year high of 7.35% in December, 2019

According to the data released by Ministry of Statistics and Programme Implementation on January 13, 2020, the food inflation increased to 14.12% in December 2019 as compared to 10.01% in November 2019. The CPI (consumer Price Index) rose to 7.35% as compared to 5.54% the previous month. The inflation was increase was mainly due to vegetables


In December 2018, the food inflation was -2.65%. Vegetable inflation in urban areas touched 75% and at the country sides it was at 53%. Onion inflation doubled as compared to the previous month. It was 128% in November and it increased to 328% in December.


The soaring crude oil prices due to the increasing tensions between Iran and US is the major reason. In the coming Budget, GoI is expected to increase its spending largely on infrastructure and cut taxes. This might stoke inflation further.


For the first time, the inflation has breached RBI’s target inflation of 4% (±2%). Predicting the situation, RBI had kept its policy interest rates on hold in its policy review of December 2019.


As inflation increases, the following can be expected

  • Increase in interest rates that will increase cost of borrowing
  • Slow-down in investment and economic growth

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US Federal Reserve raised lending rates to 2.5 per cent

The US Federal Reserve has raised the key interest rates to a range of 2.25 per cent to 2.5 per cent. This is the 4th raise in the Federal Reserve’s rates this year and has reached the highest point since 2008. The main implication of the raising of the interest rates would be an increase in the borrowing costs for individuals and businesses.

The Fed has been raising the interest rates gradually as the US economy continues to strengthen. The Fed began tightening of the credit about three years ago and the current hike is the Fed’s ninth hike since then. But recently the US Federal Reserve has been considering slowing down or halting it’s hiking of the rates due to factors like global economic slowdown, the trade war between USA and China, still-mild inflation, fall in stock prices to avoid weakening the US economy too much.

Current Position of the US Economy:

Presently, the US economy is showing strength. The unemployment rate has gone down to 3.7 per cent which is a 49-year low. Consumers are spending freely which is the main engine of the economy. The economy has grown by about 3 per cent this year, which is the best growth rate of the US economy in more than a decade.

But there are a set of challenges that the US economy is facing which includes Donald Trump’s protectionism and Trade war, slowing down of China’s economy, and Brexit. It is feared that the US economy might slow down in 2019 as the benefits of the stimulus fade away. The rise in US interest rates has started weakening the loan-sensitive sectors of the economy such as housing, autos. Additionally, the Fed has been gradually decreasing Treasury and mortgage bonds which is going to put more upward pressure on the borrowing rates for consumers and businesses.

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