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BOE holds interest rate, sticks to outlook for modest tightening

[LONDON] Bank of England policy makers left interest rates unchanged on Thursday, moving into a holding pattern after November saw their first hike in a decade.

The Monetary Policy Committee reiterated that "further modest increases" in the key rate would probably be needed over the next few years if the economy performed as expected, without providing additional detail on the timing. The rate was held at 0.5 per cent, as predicted by all economists in a Bloomberg survey.

The rate decision was unanimous, marking the first time the nine policy makers led by Governor Mark Carney have been in agreement since February. Markets aren't pricing in another increase until late 2018, and some observers say the bank may not move at all next year.

The BOE's latest analysis cited two "significant events" in the past month, both of which could be positive for the economy. It said Chancellor Philip Hammond's Budget in November would lift both economic growth and inflation in the coming years and noted the progress in the UK's withdrawal negotiations with the European Union.

On Brexit, which remains the "main challenge" for monetary policy, the BOE said the latest developments reduce the chance of a disorderly exit. They are also "likely to support household and corporate confidence," it said.

The bank also noted that recent indicators of economic growth this quarter have been "softer than expected," and it repeated a line that any rate increases will be limited and gradual. The pound pared its advance after the decision and was little changed at US$1.3423 as of 12.04 pm London time.

The bank sees a gradual pickup in domestic inflationary pressure, maintaining its view from November, when it lifted interest rates from a record-low 0.25 per cent. UK inflation remains far above the central bank's 2 per cent target, boosted by the pound's weakness following Britain's 2016 vote to leave the EU.

While price growth is forecast to ease next year, the bank is concerned about a buildup of unwelcome domestic inflation pressures due to persistently sluggish productivity growth and a Brexit-related loss of labor supply.

That analysis played a large part in driving November's rate hike. Since then, policy makers have presented a fairly united front in public, with few signs of overt dissension from the view that two more increases may be needed in the next three years to meet the inflation target.