By Jason Douglas and Paul Hannon

LONDON--The Bank of England said Thursday it expects faster growth in the U.K. over the next few years than previously thought, though officials signaled they are in no rush to raise borrowing costs as Britain's exit from the European Union continues to cast a shadow of uncertainty over the economy.

Officials led by Gov. Mark Carney held the central bank's benchmark interest rate steady at 0.25% at the conclusion of their February policy meeting and agreed to halt purchases of government bonds now that they have reached their GBP435 billion ($551 billion) target, the BOE said. A smaller program of corporate bond purchases, scheduled to run for theremainder of the year, will continue.

The central bank's latest forecasts show it expects the economy will grow faster in 2017 and 2018 than it did in November, and that annual inflation will overshoot its 2% target within months, propelled by a weak pound.

Sterling fell to $1.2630 from $1.2670 shortly after the BOE released its policy statement.

Officials reiterated that they are prepared to tolerate a long spell of above-target inflation to keep the economy on an even keel as the U.K. charts its exit from the EU. Prime Minister Theresa May has said she plans to give formal notice of Britain's withdrawal from the bloc before the end of March.

But they also stressed that their tolerance for rapid inflation has limits, and they will consider a rate increase if the economy's performance exceeds their expectations.

"If we do see a situation where there is faster growth in wages, or spending doesn't decelerate, or somecombination, one can anticipate that there would be an adjustment in interest rates," said Mr. Carney.

The minutes also record that, for some unnamed members of the nine-member Monetary Policy Committee, the case for a rate increase was strengthening, though the panel voted unanimously in February to stay on hold.

In common with many other forecasters, the BOE was wrong-footed in 2016 by the economy's resilience in the wake of June's Brexit vote. The central bank cut interest rates and restarted its bond-buying program in August in anticipation of a sharp slowdown, but buoyant consumer spending in the second half of the year instead helped the U.K. economy notch up the fastest growth rate in 2016 among the Group of Seven leading economies.

The BOE's latest forecasts show it still expects a slowdown in the coming years as quickening inflation and subdued wage growth eat into household spending. But it said Thursday it expects that slowdown to be more gentle than it feared in November, with growth this year now projected at 2% and growth in 2018 at 1.6%, as weaker consumer spending is offset by easier fiscal policy from Mrs. May's government and a healthier growth in the global economy. It previously expected growth of just 1.4% this year and 1.5% in 2018.

Sterling's slide since June's referendum is forecast to drive inflation above its 2% goal by the second quarter of this year. Officials forecast inflation peaking at around 2.7% late next year before drifting gradually back to target. Higher inflation is a price worth paying to avoid job losses, the MPC said.

The central bank drew criticism from pro-Brexit lawmakers ahead of the referendum for warning that the economy might slow if Britons chose to quit the EU. Proponents of withdrawal say the economy will prosper by inking new trade deals across the world and cutting EU red tape. The BOE said Thursday itstill expects uncertainty over the U.K.'s future ties to the EU to weigh on the economy for some time.

"The Brexit journey is really just beginning," said Mr. Carney. "While the direction of travel is clear, there will be twists and turns along the way."

Some analysts have speculated that the BOE would be very reluctant to raise its key interest rate before the U.K. leaves the EU, a departure that is expected in early 2019. However, Mr. Carney declined to rule that out.

"We'll calibrate policy appropriately regardless of the timetable," he said.

In the U.S. Wednesday, the Federal Reserve said it remains on track to gradually raise short-term interest rates this year, though gave no hint about when the next increase might come.

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

(END) Dow Jones Newswires

February 02, 2017 11:23 ET (16:23 GMT)

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