The Bank of England kept interest rates on hold in Gov. Mark Carney's final meeting, waiting for more evidence of an economic rebound before supporting it with a cut.
Policymakers voted 7-2 to keep the benchmark at 0.75%, an unchanged split that belied investor expectations the decision was on a knife-edge. The committee noted that surveys of business activity have picked up "quite markedly in some cases" since Prime Minister Boris Johnson's election victory removed much of the near-term" uncertainty related to Brexit.
Yet officials also signaled easing may be needed soon, cutting their GDP forecasts to the lowest level since the global financial crisis. They predicted that inflation will only return to target by the end of 2021.
"This is less of a case of so far so good, and more a case of so far, good enough," Mr. Carney said in a news conference that followed the announcement.
The pound traded 0.6% higher at $1.3096 at 12:52 p.m. London time. Investors are now betting on a rate cut late this year.
The Bank of England's updated economic projections assume "an immediate but orderly move" to a new "deep free trade agreement" with the EU at the end of the year.
If that doesn't happen, or the economy weakens anyway, the decision on a Bank of England response will fall to Mr. Carney's successor, Andrew Bailey. He'll take up his post in mid-March, the same month the government unveils a budget that ends almost a decade of austerity. That fiscal boost isn't included in the current forecasts.
Policymakers said they saw signs of subdued inflationary pressure, and added that slower-than-expected supply growth will keep a lid on the expansion.
"Policy may be need to reinforce the expected recovery in U.K. GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak," minutes of the meeting said.
Officials also tweaked their language on the need for limited and gradual rate increases if growth comes in line with projections, saying just "some modest tightening" might be required.
The Bank of England lowered forecasts for U.K. gross domestic product to a 0.75% gain this year, from 1.25% in November. Projections for 2021 and 2022 were both a quarter-point lower, while it cut its estimate for the fourth quarter of last year to zero. Based on money-market pricing for a rate cut this year, inflation is seen returning to the 2% target in 2021. Without the cut, the forecasts show it remaining below that mark.
Michael Saunders and Jonathan Haskel maintained their push for an immediate rate cut, saying that indicators of expectations hadn't been a close guide to output and that downside risks to growth remained.
The Bank of England sat out the global central bank easing of the past year as the European Central Bank restarted its bond buying. The Federal Reserve reduced borrowing costs three times in 2019. It kept its benchmark on hold Wednesday, albeit with dovish overtones. Weak data and dovish comments from officials at the start of the year prompted speculation that a Bank of England cut was coming. More recently, reports on business confidence and house prices suggested that Mr. Johnson's election had boosted sentiment.
That left analysts and investors split. Markets were pricing in about 50% chance of a cut, while 17 of 61 economists also predicted a move. That may open Mr. Carney to further criticism over his communications after a lawmaker dubbed him an "unreliable boyfriend" near the start of his tenure.
