The Bank of England's (BOE) monetary policy committee, which has maintained its rate since March 2009, was unanimous in its decision to keep the rate steady as in February, March and April. Prior to February, one committee member had voted since August 2015 to raise the rate.
The U.K. will vote on June 23 on whether to remain in the EU and the BOE said the combination of changes in demand, supply and the exchange rate could "lead to a materially lower path for growth and a notably higher path for inflation" than projected in its latest inflation report.
In the event of a vote to leave the EU, households could defer consumption and firms delay investment, leading to higher unemployment.
"Sterling is also likely to depreciate further, perhaps sharply," the BOE said, adding this could lead to higher inflation and that it would then face a trade-off between stabilizing inflation and employment and economic output on the other hand.
There are already "increasing signs that uncertainty associated with the EU referendum has begun to weigh on activity," the BOE said, noting that growth slowed in the first quarter and further deceleration is expected in the second quarter.
In its inflation report, the BOE trimmed its forecast for 2016 Gross Domestic Product growth to 2.0 percent from February's forecast of 2.2 percent and the 2017 forecast to 2.3 percent from 2.4 percent. For 2018 the forecast was cut to 2.3 percent from 2.5 percent.
But the BOE also said the uncertainty surrounding the EU vote was making the relationship between economic data and actual economic momentum hard to interpret.
"With macroeconomic and financial indicators likely to be less informative than usual in light of the referendum, the Committee is currently reacting more cautiously to data releases than would normally be the case," the BOE said.
The U.K. economy grew by an annual rate of 2.1 percent in the first quarter of this year, unchanged from the fourth quarter of last year, although manufacturing output declined.The forecast for consumer price inflation for the second quarter of this year was unchanged at 0.4 percent but lowered to 1.5 percent for Q2 2017 from a previous forecast of 1.6 percent.
But as the dampening effect of past falls in energy and food prices unwinds, the BOE expects inflation to rise "mechanically" and spare capacity should be eliminated next year, pushing up domestic costs and inflation toward the bank's 2.0 percent target.
For Q2 2018 inflation is seen at 2.1 percent and then 2.2 percent by the second quarter of 2019.
As illustrated by its forecast, the BOE said it still "judges that it is more likely than not that Bank Rate will need to be higher by the end of the forecast period than at present," but given the headwinds rates will only rise more gradually than in past rate cycles.
The Bank of England released the following statement: