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Bank of England Governor Mark Carney said investors were underestimating how much the central bank could raise interest rates even as it kept borrowing costs on hold on Thursday because of uncertainty over Brexit.

The BoE said there was little immediate risk from waiting for a clearer view of what Britain’s departure from the European Union would mean for the economy and its nine rate-setters all voted to keep its benchmark rate at 0.75 per cent.

But Mr. Carney made clear his view that investors were too relaxed about the pace at which the BoE could resume its gradual rate increases to ease Britain off the stimulus of low borrowing costs that has been in place for more than a decade.

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“There are insufficient hikes in the current market curve to be consistent with our remit,” he told reporters.

The BoE’s position that higher borrowing costs will be needed in future represents a more hawkish stand than either the U.S. Federal Reserve or the European Central Bank.

The BoE upgraded its forecast for growth in the world’s fifth-largest economy to 1.5 per cent, up from the decade-low 1.2 per cent it predicted in February, largely reflecting better global economic prospects.

“The underlying path of GDP growth appears to be slightly stronger than previously anticipated, but marginally below potential,” the BoE said.

Sterling whipsawed after the central bank’s announcement and as Mr. Carney began a news conference but was largely in line with its level of earlier on Thursday at around US$1.3050 to a pound.

During the first quarter of 2019 the economy probably grew by 0.5 per cent because of businesses building up stocks ahead of Brexit, the BoE said – a faster rate than the 0.2-per-cent growth it had forecast in February. However, the central bank expects growth to slow to 0.2 per cent during the current quarter.

Britain’s departure from the EU, originally slated for March 29, was delayed last month until Oct. 31, unless Parliament approves a deal sooner.

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This removes the immediate risk of a disruptive, no-deal Brexit that hung over the BoE at its previous meeting in March, but extends a period of economic uncertainty. The BoE said this made some economic data, such as business surveys, harder than normal to interpret.

“More generally, there remained mixed signals from indicators of domestically generated inflation and the cost of waiting for further information was relatively low,” the BoE said, adding it continued to assume Brexit would go smoothly.

British inflation is currently just below its 2-per-cent target, but unemployment is at its lowest in more than 40 years while wages are rising at their fastest rate in a decade.

Before Thursday’s decision, financial markets saw only a 35-per-cent chance of an increase this year.

The BoE has raised interest rates only twice since the 2008 financial crisis, in November, 2017, and August last year.

“The Committee continues to judge that … an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate,” the BoE said, echoing earlier language.

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The BoE’s tightening stand contrasts with the position of the U.S. Federal Reserve, which on Wednesday said it saw no case for moving rates in either direction, and faces pressure to lower interest rates from the White House.

Updated BoE forecasts show the central bank expects inflation – currently 1.9 per cent – to exceed its 2-per-cent target in two and three years, by a margin similar to what it predicted in February.

The forecasts are based on financial market pricing, which assumed BoE interest rates would not reach 1 per cent until late 2021 – around 15 basis points less in tightening than was priced in just before February’s BoE meeting.

The BoE said that after three years, the economy would be overheating to a greater extent than it forecast in February if interest rates rose only to 1 per cent, and that inflation would be higher if sterling had not recently strengthened.

It also cut its forecast for unemployment sharply to 3.7 per cent in two years, down from 4.1 per cent in February, reflecting businesses’ preference to hire staff, rather than make long-term investments, at a time of economic uncertainty.

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