BoE holds interest rate at 0.5% and upgrades growth forecast

The Bank of England has upped its growth forecast for the UK economy and voted 9-0 to keep interest rates at 0.5% - but hinted that rates may rise sooner and more sharply than expected.

Economists expect the next interest rate hike to come as soon as May, to dampen the impact of a stronger global economy on UK inflation, the BBC says. The Bank’s key interest rate has remained unchanged since November, when it was raised for the first time in more than a decade.

PwC senior economic adviser Andrew Sentance told Reuters that the UK will probably “see at least one quarter point rise in 2018 and possibly two or three”.

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Sterling spiked against the US dollar following today’s news, “as higher rates in an economy tend to favour the local currency with the anticipation of more investment”, CNBC says. The pound hit almost 1.400 against the dollar, trading close to 1.397 by mid-afternoon.

The BoE also released its Quarterly Inflation Report today, showing UK GDP is expected to expand by 1.7% in 2018 - up from its previous projection of 1.5% in November - and forecasting 2019 growth of 1.8%.

In an important caveat, the report says Brexit developments “remain the most significant influence on, and source of uncertainty about, the economic outlook”.

Nevertheless, BoE governor Mark Carney told reporters today that the Bank is confident in its ability to forecast the direction of the British economy despite the “uncertainty” caused by the “exceptional circumstances” surrounding the Brexit negotiations.

His “hawkish” comments pushed the pound higher and “encouraged” investors to sell British government debt, reports the Financial Times. Yields on two-year gilts rose to their highest level since 2015.