The Bank of England (BoE) Thursday kept its benchmark interest rate unchanged at 0.25 percent, while economic growth is forecast to strengthen, reaching 2.2 percent of GDP in 2016.

BANK RATE UNCHANGED BUT INFLATION TO RISE

The Monetary Policy Committee (MPC) of the BoE said that it believed the pass-through rate of the impact of sterling's large depreciation in 2016 would be faster than in previous projections, but the depreciation would likely still push inflation above the MPC's 2 percent target three years from now, before returning closer to target in 2020.

In a dual announcement, the BoE forecast that inflation would increase above its target of 2 percent to 2.7 percent by the final quarter of 2018.

The forecast contained in the central bank's quarterly inflation report released at midday foresees an increase in consumer price inflation (CPI) driven by higher prices.

CPI is currently at 1.0 percent (September figures), up from 0.6 percent in August, a rise accountable to past falls in food, energy and other imported goods prices having fallen out of the annual comparison.

The report noted: "Higher import prices, following the 20 percent depreciation of sterling over the past year, however, mean that CPI inflation is judged likely to rise above the 2 percent target by mid-2017, before peaking at 2.75 percent a year later and then beginning to fall back."

LIMITS ON TOLERATING INFLATION

Six of nine MPC members are bank officials including the governor. They said that its remit was that monetary policy should balance with its effect on inflation (in this case returning inflation to target) and on support for economic activity.

The MPC cut the bank rate by 25 basis points to 0.25 percent in August and extended its quantitative easing program as a policy response to stimulate the economy after the effects of the Brexit vote.

The fall in sterling since the August report and its effect on CPI had "adversely affected that (policy) trade-off", the report noted.

The effect is temporary, waning over the forecast period of three years, and directly tackling it would be counter-productive because of the negative effect on output and unemployment growth, said the report.

But the MPC report said that there were "limits to which above-target inflation can be tolerated," indicating that policy tools -- principally the bank rate -- could be utilized again in the future.

The MPC has assumed that the fall in sterling will boost exports and lower imports. It also assumes that the sterling fall is connected with market pessimism about UK-EU Brexit negotiations, and that firms will make more significant decisions than previously thought based on the assumption that future EU market access will be restricted.

The benefits to net trade of the 6.5 percent fall in sterling since the last forecast in August are offset by the assumption of the effect on firms' decision making which will weigh on investment. This period of low investment will "reduce growth in the capital stock and therefore productivity".

GDP GROWTH FORECAST INCREASED, HOUSEHOLD SPENDING SLOWDOWN

Economic growth is forecast to strengthen compared with the August report, reaching 2.2 percent of GDP in 2016 (August 2 percent), and 1.4 percent in 2017 (August 0.8 percent).

However, growth is lower for 2018 at 1.5 percent (August 1.8 percent) and the same for 2019 at 1.6 percent.

"Lower sterling exchange rate supports net trade but... companies begin to adjust activity in light of anticipated changes to future trading relationships," the report noted.

It also noted that there was "little impact" yet from the Brexit vote on household spending, the main driver of economic growth,

But it forecast that there would be an impact; nominal wage growth would remain modest, and employment growth would slow, but the impact of rising inflation from increased import costs would cut household spending, with a forecast of just 1 percent growth in consumer spending which is well below historical average rates.