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.