The Bank of England kept its benchmark interest rate steady on Thursday after data showed consumer prices in the U.K. fell on the year in April for the first time in more than half a century.
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The BOE said policy makers on the rate-setting Monetary Policy Committee voted to keep the central bank's main interest rate at 0.5% and to leave the size of its bond portfolio unchanged at £375 billion ($578 billion) following their regular monthly meeting.
The decision was as expected. Sterling and government bond prices were broadly unmoved.
Figures published late May showed consumer prices fell 0.1% on the year in April, marking the first annual decline in prices in the U.K. since 1960, according to official estimates.
The dip raised the specter of deflation in Europe's third-largest economy, a potentially harmful spell of sustained and widespread falls in prices that hurts consumer spending and makes it harder for governments, businesses and consumers to service their debts.
But BOE officials led by Governor Mark Carney have played down the risk, saying that they expect price-growth to reassert itself soon. The central bank's latest forecasts show officials expect annual inflation to return to their 2% target by early 2017 provided interest rates rise in line with expectations in financial markets.
Investors expect the BOE to begin slowly raising borrowing costs in mid-2016. Officials say they expect future rate rises to be slow and gradual.
The U.K. was the fastest-growing economy among the Group of Seven leading industrial nations in 2014 but growth stuttered in the first quarter of this year.
Official data show the economy expanded just 0.3% in the first three months of 2015, an annualized rate of 1.2%.
Survey data this week suggests that growth has picked up in the second quarter—-but perhaps not as quickly as policy makers were predicting. Financial information firm Markit said on Wednesday that its monthly gauges of activity in the services, manufacturing and construction sectors imply growth in the second quarter of 0.4%.
The U.S. Federal Reserve has also been grappling with weak first-quarter growth but is expected to raise short-term interest rates in the U.S. later this year. The European Central Bank signaled on Wednesday that it will press ahead with efforts to spur faster growth and inflation in the 19 nations that use the euro.