Bank keeps interest rates at 0.25% but warns of slow growth and higher inflation

The Bank of England has kept interest rates on hold and raised its economic outlook for this year and next, but warned that tough times were still ahead with lagging growth and a jump in inflation set for 2018.

Minutes for the latest Monetary Policy Committee (MPC) meeting showed members voted unanimously to keep rates at 0.25%, having been slashed from 0.5% to a fresh record low in August as part of a post-referendum stimulus package worth £170 billion.

In its latest quarterly inflation report, the Bank raised its forecast for Gross Domestic Product (GDP) growth over the next two years, revised up from 2.0% to 2.2% for 2016 and from 0.8% to 1.4% in 2017.

It follows better-than-expected growth of 0.5% in the third quarter, with the Bank also now pencilling in fairly steady expansion of 0.4% in the final three months of 2016.

But the Bank slashed its forecast for growth in 2018 to 1.5% from 1.8% and gave a gloomy outlook for households, with higher unemployment and soaring inflation set to their spending power.

The pound continued its upward trajectory following the news, after rising in the wake of a High Court decision which saw campaigners win a landmark battle over Prime Minister Theresa May's decision to use the royal prerogative to trigger Brexit.

Sterling leapt to 1.248 against the US dollar, a rise of 1.45% on the day. Against the euro, the pound was 1.7% higher at 1.128.

The Bank's relatively upbeat short-term outlook has dashed plans for another interest rate cut this year, which policymakers said in September was still on the cards.

"In light of the developments of the past three months, all MPC members agreed that the guidance it had issued following its August meeting regarding the likelihood of a further rate cut in bank rate had expired," the minutes said.

Financial markets are now predicting the Bank will hold interest rates steady through to the end of 2019, when they expect the MPC to vote for an increase.

In the face of fears over the impact of soaring inflation caused by the collapse in the pound since the Brexit vote, the Bank insisted the surge would be temporary.

It said raising rates to offset the higher inflation - predicted to hit 2.7% next year - would be "excessively costly" to the economy.

The MPC minutes explained that it would be "appropriate to accommodate a period of above-target inflation", but said there were "limits" to which they would tolerate a rise in consumer prices above 2%.

Inflation, currently running at 1%, is now expected to rise to 1.3% for 2016, nudged up from forecasts of 1.2% in August, while inflation expectations for 2017 were revised up from 2% to 2.7% and 2.4% to 2.7% for 2018 and 2.5% in 2019 - the highest inflation overshoot the MPC has ever forecast.

The Bank said it would consider the cause of the inflation overshoot, including the depreciation of sterling, which is expected to feed into both input costs and consumer prices over the coming years.

The pound has depreciated 21% since its November 2015 peak, the minutes noted.

The consequent rise in inflation could lead to a "reasonably significant" slowdown in household spending, as the hike in the cost of living outstrips wage growth.

Unemployment is also expected to rise to 5.5% from mid-2018 and stay around that level throughout 2019.

That will mark the year Bank governor Mark Carney has said he will step down.

Mr Carney, who made the announcement earlier this week, said he was timing his departure to coincide with Britain's expected exit from the EU, assuming Mrs May sticks to her pledge to trigger Article 50 in spring 2017.

However, the governor has faced criticism from analysts, who say it will come at a trying time for the UK economy.

In the meantime, analysts say Mr Carney is acting as a steady, guiding hand for the economy.

Dennis de Jon, managing director of UFX.com, said: "Although some prominent Vote Leave supporters would disagree, Carney is widely regarded as a safe pair of hands to guide Britain through this precarious period."

The governor faced mounting speculation that he was preparing to step down early amid complaints that he went too far in warning of the economic dangers of leaving the EU in order to bolster Remain during the referendum campaign.