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BoE holds key interest rates with 7-2 vote, downgrades Q4 growth projection

The Bank of England has kept its key interest rates unchanged at 0.75% after a 7-2 split decision by its monetary policy committee.

The consensus estimate of economists polled by Econoday was for interest rates to remain unchanged.

At its November meeting, two policymakers, Jonathan Haskel and Michael Saunders, voted to cut rates by 25 basis points.

Annual inflation in the U.K. remained unchanged month over month at a 3-year low of 1.5% in November — below the central bank's target of 2%— and is still expected to drop to around 1.25% by spring 2020, due to temporary declines in regulated energy and water prices.

Slower GDP growth

The central bank now expects GDP growth of 0.1% in the fourth quarter, down from a growth rate of 0.2% anticipated in November.

The bank flagged the possibility of household and business sentiment rising in the near term, and associated their movement to the progress of Brexit negotiations.

"The Committee will, among other factors, continue to monitor closely the responses of companies and households to Brexit developments as well as the prospects for a recovery in global growth," the bank said in a statement.

In addition, the bank said it is ready to raise interest rates at a "gradual pace" and to a "limited extent" to maintain inflation sustainability if the economy recovers as per expectations.

The committee voted unanimously to maintain purchases of pound-denominated nonfinancial investment-grade corporate bonds at £10 billion and of U.K. government bonds at £435 billion.

Pound erases gains

The pound gave up gains after the decision to trade little changed at $1.3081 at 12:59 p.m. in London.

The decision is days after disappointing private-sector output data showed manufacturing and services sectors falling further into contraction territory, with businesses attributing the decline in activity to subdued global economic conditions and uncertainty about domestic politics and Brexit.

In a Dec. 16 report, S&P Global Ratings said it expects U.K. GDP growth to ease to 1.0% in 2020 from 1.3% in 2019 and that instability will continue to weigh on investment and growth despite a decisive victory by the ruling Conservative Party in the Dec. 12 election clearing some Brexit-related uncertainty.

The U.K. Conservative Party won its largest majority since 1987 in the Dec. 12 snap election, paving the way for Prime Minister Boris Johnson to get his Brexit deal ratified in Parliament. However, some uncertainty is expected to remain as the two sides engage in talks about their future relationship.