Bank of England Keeps Benchmark Rate on Hold

The Bank of England kept its benchmark interest rate on hold Thursday as cooling inflation eases the pressure for higher borrowing costs.

The U.K. central bank said its rate-setting panel agreed to leave the benchmark rate at a low of 0.5% and the size of the BOE's bond portfolio at 375 billion pounds ($587.3 billion) following its two-day meeting.

Sterling and U.K. government bonds were broadly unmoved by the decision, which had been expected.

Central banks around the world are grappling with low inflation and the BOE is no exception, despite the U.K.'s relatively fast pace of economic growth. The economy expanded at an annualized rate of around 3% in the first nine months of the year and the International Monetary Fund predicts the U.K. will be the fastest-growing developed nation this year, although the economy's pace is expected to slacken in 2015.

Annual inflation in the U.K. was 1.3% in October and BOE officials expect it to cool further in the months ahead, dragged lower by plunging prices for food, oil and other commodities. BOE Governor Mark Carney told lawmakers in recent testimony he expects the annual rate will soon dip below 1%, a decline that would oblige him to write to Treasury chief George Osborne explaining how the BOE intends to get inflation back to its 2% target.

Subdued inflation is proving a boon for Mr. Osborne, who has fallen behind in his efforts to plug a shortfall between government spending and income. New forecasts for Britain's public finances published Wednesday showed weak price growth means future spending on welfare will rise more slowly than expected, helping Mr. Osborne to narrow the deficit.

Weak inflation is also reducing the pressure on the BOE to lift interest rates. The central bank's November forecasts showed inflation rising slowly back to 2% by late 2017 provided interest rates nudge up at the gradual pace expected in financial markets. Investors expect the first rise in borrowing costs towards the end of 2015 or early 2016, according to overnight interest rates that hug the BOE's benchmark rate.

Central banks are increasingly charting different paths. The BOE and the Federal Reserve are inching towards raising short-term interest rates as their economies accelerate. The European Central Bank and the Bank of Japan, by contrast, are ramping up their stimulus efforts to lift prices and spur growth.