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Bank of England hikes growth forecasts, keeps rates, bond purchases unchanged

BOE to next cut rates in February 2017: BAML

The Bank of England opted to hold base interest rates at record lows on Thursday and to maintain the size of its newly enlarged asset-purchasing program.

The bank's Monetary Policy Committee (MPC) voted unanimously in September to hold the base rate at 0.25 percent, which was cut in August. It also voted unanimously to maintain the size of its corporate bonds purchases at up to £10 billion ($13.2 billion) and government bond purchases at £435 billion.

In addition, it upgraded its growth forecast for the third quarter to 0.3 percent from 0.1 percent, which it predicted last month.

"Since the August inflation report, a number of indicators of near-term economic activity have been somewhat stronger than expected. The committee now expect less of a slowing in U.K. GDP (gross domestic product) growth in the second half of 2016," the bank said in the minutes from its latest meeting.

It added that so far there had been no sign of a major hit to the global economy from the U.K.'s vote to leave the European Union in June.

U.K. data has improved since the bank introduced the large batch of stimulus measures last month to boost the economy following the shock of the leave vote. Official retails sales data for August came in stronger than expected on Thursday and last month's Markit/CIPS U.K. services Purchasing Managers Index (PMI) rebounded sharply from July's 89-month low. However, it is unclear how long the upbeat data trend will last.

The minutes showed that the majority of members expected to vote for a further cut in the base rate before the end of the year. This would likely take the rate to just above zero.

Chris Ratcliffe | Bloomberg | Getty Images

Economists polled by Reuters on Thursday forecast that the bank would cut the base rate to 0.1 percent in the fourth quarter of 2016. However, David Miles, a former member of the MPC, warned on Thursday that markets should not bank on rates remaining at ultra-low levels for a prolonged period.

The U.K. economy has also been boosted by the weaker pound, which slumped after the vote to leave the European Union on June 23. At $1.32 to the pound, sterling is down around 12 percent from the peak it hit just prior the referendum.

"Sterling has been trading very well, it has been very stable, but actually I wouldn't attribute so much of that to the Bank of England. Carney has been, in the last week or so, trying to recover a bit of credibility and suggest that it is down to their messages. But the market view is that is a little tenuous," Richard de Meo, founder of Foenix Partners, told CNBC on Thursday.

The Bank of England has published a list of senior secured corporate bonds that are eligible for purchase. Issuers include FTSE 100-listed AstraZeneca, BAE Systems, BAT, British Telecom, Centric and GlaxoSmithKline. The Dow companies with eligible bonds are McDonald's, General Electric, IBM, Pfizer, Procter & Gamble, Apple and Wal-Mart.

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