Bank of England Bets on Smooth Brexit -- 3rd Update

The Bank of England forecast steady if unspectacular growth for the U.K. in the years ahead--provided the country's exit from the European Union goes smoothly.

In its latest set of economic forecasts, the central bank estimated that gross domestic product growth in the U.K. would increase slightly to 1.9% in 2017, as a pickup in exports and business investment helped offset a squeeze on consumer spending from rising prices.

Officials held the central bank's benchmark interest rate steady at 0.25% and signaled there was no rush to raise borrowing costs from record lows, despite above-target inflation. They did say, though, that interest rates might need to rise more quickly than the glacial pace expected by investors, who doubt the central bank will move until well into 2019.

This comes ahead of a June 8 national election in the U.K. and negotiations between London and Brussels over the terms of the country's exit from the European Union.

Meanwhile, the Federal Reserve is seen pressing ahead in the U.S. with a gradual rise in borrowing costs in 2017 and the European Central Bank is considering gently dialing back stimulus measures in the 19-country eurozone.

The BOE said Thursday its latest projections assumed a "smooth" Brexit, with a transition period that largely preserved current trading and other arrangements beyond its three-year forecast period.

"We have assumed that the process of leaving the EU would be a smooth one," BOE Governor Mark Carney said in a news conference. "There will an agreement and there will be an implementation period to that new agreement. We don't know what the shape of that agreement will be."

Mr. Carney said the central bank hadn't made forecasts for a scenario in which no deal was struck and there was a "sharp break" between the EU and the U.K.

"What we do have, is an economy that gradually adjusts," he said.

Tensions between the U.K. and the EU escalated last week when Prime Minister Theresa May accused European officials of issuing threats against Britain, hours after the EU's chief negotiator, Michel Barnier, detailed far-reaching demands for the Brexit divorce deal.

Asked if these tensions made an agreement less likely, Mr. Carney said the U.K. and the EU had publicly stated their desire for an orderly split.

"That is the objective of both sides and it's not our place to call those into question," he said. "It's very early days in the whole process."

Minutes of the Monetary Policy Committee's discussions in May showed a majority favored keeping the central bank's main interest rate steady. Only one panel member, former White House economic adviser Kristin Forbes, dissented, voting for an immediate increase in the rate to curb inflation.

Sterling weakened in response, since some investors had expected support for Ms. Forbes' stance from one or more other rate setters.

The central bank sees annual inflation peaking in 2017 at 2.8%--well in excess of its 2% target--before easing off in 2018. Officials say the surge in price growth is being driven primarily by a weakened pound and that this effect will eventually fade.

The European Commission raised its U.K. growth forecasts for the second time in six months on Thursday, saying it no longer expected a slowdown in 2017 in response to last year's Brexit vote. It now expects the U.K. economy to grow by 1.8% in 2017, unchanged from 2016.

Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

May 11, 2017 09:04 ET (13:04 GMT)