The Bank of England (BOE), the central bank of the United Kingdom, left its monetary policy stance steady but raised its forecast for economic growth sharply and continues to expect inflation to remain above its target in coming years as a weaker pound sterling boosts import prices.
The BOE, which in August cut the Bank Rate to the current 0.25 percent and launched a range of stimulus measures following the June vote to exit the European Union, now expects economic growth of 2.0 percent this year, sharply up from its November forecast of 1.4 percent.
The UK economy is expected to expand by 1.6 percent in 2018, up from the earlier forecast of 1.5 percent and for 2019 growth is seen at 1.7 percent, up from 1.6 percent.
"Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum," the BOE said.
In the fourth quarter of 2016 the UK economy grew by an annual rate of 2.2 percent, the same as in the third quarter.
In contrast to expectations, UK households have not reined in their spending in anticipation of higher inflation and thus lower real incomes, reducing their savings rate and raising their debt levels.
In addition, the BOE said the raised growth outlook reflected government fiscal stimulus, improved global growth, higher equity prices and supporting credit conditions.
But uncertainty over the UK's future trading position within Europe continues to weigh on business investment, which is seen lower in three years that in pre-Brexit projections.
Continued moderate growth in wages and higher import prices will also weaken the rise in household income in coming years, resulting a slowdown in consumer spending, BOE said.
UK inflation has accelerated in recent months and rose to 1.6 percent in December from 1.2 percent in November, boosted by higher import prices from the fall in the pound, and BOE said "further substantial increases are very likely over the coming months."
In the first quarter of this year inflation is seen averaging 2.0 percent, in line with the BOE's target, and up from 1.8 percent forecast in November. In the first quarter of next year inflation is seen hitting 2.7 percent, down from 2.8 percent previously forecast, but then remain at an unchanged 2.6 percent in the first quarter of 2019 before easing to 2.4 percent by Q1 2020.
Higher inflation is expected by financial markets to lead to an increase in rates by the BOE, with forward rates seen at 0.3 percent in Q1 2018, then 0.5 percent in Q1 2019 and 0.7 percent in Q1 2020.
Despite high inflation, the BOE reiterated that it still considers it appropriate to allow inflation to remain above its target for a "somewhat longer period than usual" as offsetting the impact of a weaker pounds on inflation would only be achievable by raising unemployment and thus income growth.
However, the BOE added that "there are limits to the extent that above-target inflation can be tolerated," with its policy stance depending on the trade-off between inflation and economic slack.
The pound fell sharply following the June vote to leave the EU but began to rise in recent weeks.
But it fell sharply in response to today's BOE statement and was trading at 1.255 to the U.S. dollar, down from1.266 yesterday. Compared with the start of this year, the pound is down 2 percent and down 18 percent since the start of 2016.
The Bank of England released the following monetary policy summary: