Bank of England keeps interest rates unchanged and cuts growth forecast for 2017

The Bank of England held the UK's benchmark interest rate at 0.25% at the conclusion of its latest Monetary Policy Committee (MPC) meeting on Thursday (11 May).

MPC members voted 7-1 in favour of keeping the interest rates unchanged, with US economist Kristin Forbes the only dissenter.

The benchmark rate had been stable at 0.5% from March 2009 to August 2016, when the MPC decided to reduce it by 25 basis points that month, in the wake of dire survey data following the Brexit vote.

The holding pattern was supplemented yet again by a decision to maintain the central bank's asset purchase programme at £435bn ($560bn) which was in line with market expectations.

However, the BoE added the bank rate, the interest rate available to other lenders, could rise "by a somewhat greater extent" than markets expected, provided its predictions of a continued pick-up in growth would prove accurate.

Paul Hollingsworth, UK economist at Capital Economics, said the decision "lends some support to our view that interest rates are set to rise sooner" than markets expect.

"If we are right in thinking that the economy will maintain a solid pace next year, rather than slow as the MPC expects, then we think that the Committee should be in the position to take the first steps in 'normalising' monetary policy around the second quarter of 2018," he added.

The BoE also slightly cut its growth forecast for this year, from 2% to 1.9% but lifted expectations for growth next year from 1.6% three months ago to 1.7%.

The Bank also expects inflation will be higher than previously expected; peaking at 2.8% this autumn.

"In the final year of the forecast, however, the output gap closes and inflation rises slightly further above the target," the BoE said in its minutes.

"This is conditioned on the assumptions that the adjustment to the United Kingdom's new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates."

Data released last month by the Office for National Statistics showed inflation rose 2.3% in March, remaining above the Bank of England's 2% target for the second consecutive month as households' budgets face being squeezed even further.

"The weak pound since Britain's vote to leave the EU has seen inflation surge in recent months with a weaker sterling pushing up the price of imported goods," said Tom Stevenson, investment director for personal investing at Fidelity International.

"For now, it seems the Bank of England will be sitting tight on a rate rise given the headwinds the UK economy faces and the strengthening of the pound. Today's announcement introduces a more hawkish tone than we have seen previously."

Crucially, the BoE slashed its forecast for average earnings growth for this year to 2% from 3% it had indicated February. The decision echoes warnings a weak pound, coupled with rising inflation and subdued wage growth will lead to a decline in living standards. That, in turn, could have a major impact on the British economy as a whole, which is highly reliant on consumer spending.