Bank of England keeps interest rates unchanged

The Bank of England voted unanimously on Thursday to leave interest rates at 0.50% and size of the asset purchase programme at £375bn, as expected by analysts.

The Monetary Policy Committee’s decision to keep interest rates unchanged comes amid a slowdown in the UK economy and uncertainties ahead of June’s referendum on EU membership.

The BoE noted in its monetary policy statement that inflation remains well below its 2% target, largely due to falls in energy and food which are “expected to fade over the next year”. Core inflation also remains subdued due to weak global price pressures, the central bank said.

In the Inflation Report, released alongside the policy announcement and meeting minutes, the BoE said, "returning inflation to the 2% target requires achieving a balance between the drag on inflation from external factors and the support from gradual increases in domestic cost growth".

The MPC expects inflation to reach 2.1% by the second quarter of 2018 and 2.2% by the second quarter of 2019.

The BoE also cut its economic growth forecasts to 2% for 2016, down from the 2.2% it expected three months ago.

"Given some people had forecast a split vote, with 1-2 members going for a cut, and the potential for the weak data on growth to prompt a downward revision to inflation, the statement and Inflation Report are on the hawkish side relative to market expectations," according to Dominic Bryant at BNP Paribas.

The central bank said there were increasing signs that uncertainty surrounding Britain's EU referendum on 23 June has started to weigh on activity.

"The most significant risks to the MPC’s forecast concern the referendum," the BoE warned in its policy statement. "A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy."

However, Michael Hewson at CMC Markets, believes the BoE needs to make it clearer how it arrived at its "pessimistic forecasts, which while credible invite questions as to their methodology".

"Would Brexit deliver an economic shock, undoubtedly it would, but the effects on the Euro and Europe would be no less considerable, as it wouldn’t be a zero sum game, so the currency effect could be mitigated," he said.