Sterling drops after BOE announcement

A stack of British one pound sterling coins stand in front of a British Union flag in this arranged photograph in the United Kingdom, on June 13, 2016.
Jason Alden | Bloomberg | Getty Images

The British pound skewed lower Thursday after the Bank of England announced it was keeping its interest rates unchanged and raised its growth forecasts.

Sterling fell more than 1 percent against the dollar to $1.25 after reaching a seven-week high in early European trading.

The central bank kept its inflation forecast for this year at 2.7 percent but said that some of its monetary policy committee members "moved a little closer" to their limits for tolerating an overshoot in the bank's inflation target. The BoE sees inflation peaking at this level before edging slightly lower to 2.6 percent in 2018 and 2.4 percent by the end of 2019.

Thanks to the government's fiscal stimulus and an improved global outlook, the BoE lifted its gross domestic product (GDP) forecasts for the current calendar year and next. Furthermore, the bank also said that the unemployment rate in the U.K. is projected to go up slightly to 5 percent in the near term as labor demand softens.

"The resilience of the UK consumer has led the BoE to further increase its GDP forecast 2016 to 2 percent from 1.4 percent. However, there are hints that the tolerance of a number of monetary policy committee (MPC) members to higher inflation is close to their limit," Shilen Shah, bond strategist at Investec Wealth & Investment, said in a note.

"The BoE's also suggested that slack in the economy may be somewhat larger than previous thought, however inflation is still thought to peak at 2.8 percent in the second quarter of 2018. If the strength in the economy continues over the coming quarters, despite the uncertainty created by Brexit, the MPC patience may be further strained," she added.

In November, the BoE projected a growth rate of 2.2 percent for 2016 and 1.4 percent for 2017. However, the economy has proved more resilient than expected, in large part, thanks to consumer spending.

The bank led by Mark Carney has had to revise upwards its projections after the economy performed better-than-expected in the aftermath of the Brexit vote.

"Brexit is so uncertain…Trying to forecast exactly what it's going to do to growth, to sterling and therefore to inflation and therefore to the Bank of England's policy is very, very difficult," Rob Wood, chief economist at Bank of America Merrill Lynch, told CNBC before the rate decision on Thursday.

The U.K. government published a white paper on Brexit this Thursday which will now be discussed in the several committees before Prime Minister May can start negotiations with Europe. The white paper was basically a repetition of a speech Theresa May gave in mid-January where she outlined 12 points for leaving the EU.