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BOE holds rates as post-Brexit growth continues to exceed expectations

The Bank of England has kept its monetary policy unchanged but again raised its forecasts for GDP growth as the U.K. economy continues to outstrip its previous expectations of a post-Brexit vote slowdown.

The BoE's monetary policy committee voted unanimously to keep the base rate at 0.25% and its program of asset purchases at £435 billion, including £10 billion of corporate bonds. It also raised its forecast for 2017 GDP growth to 2.0% from 1.4% in its November 2016 outlook and 0.8% in August 2016, just over a month after the Brexit vote.

Policymakers had warned after the June 23, 2016, referendum that the decision to leave the EU would prompt a sharp slowdown in economic growth, and in early August the monetary policy committee cut the base rate, expanded quantitative easing and said further accommodation was likely before year-end. They also slashed their expectation for 2017 GDP growth to 0.8%.

But despite the fall in the value of the pound since the vote, Britain's economy has continued to expand, with GDP growth in the fourth quarter of 2016 estimated at 0.6%, the third straight period for which that figure was recorded.

"The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the chancellor's autumn statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households," the BoE said.

"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."

GDP growth is now projected to reach 1.6% in 2018 and 1.7% in 2019. The BoE's November 2016 forecasts were for growth of 1.5% in 2018 and 1.6% in 2019; in August it projected that 2018 growth would be 1.8%.

The BoE reiterated that monetary policy could continue to move "in either direction" in response to changes in the economic outlook, echoing language it had used previously. But it also said it would focus in particular on the interplay between wage growth — which has remained limited despite low unemployment — and consumer spending, which it expects to slow in real terms as a result of constrained pay and the prospect of higher inflation.

"[I]f spending growth slows more abruptly than expected, there is scope for monetary policy to be loosened. If, on the other hand, pay growth picks up by more than anticipated, monetary policy may need to be tightened to a greater degree than the gently rising path implied by market yields," it said.