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Bank prepares to decide on interest rates as growth defies expectations

The Bank of England will deliver its latest verdict on interest rates and the economy next week as UK growth continues to defy expectations of a Brexit vote slowdown.

Policymakers are set to keep rates on hold at 0.25% on Thursday when they meet in the wake of the latest set of impressive growth figures, which showed gross domestic product rose by 0.6% in the final three months of 2016.

The economy has grown by 0.6% in each of the last three quarters, confounding forecasts by experts - including those at the Bank - of a sharp slowdown after the vote to quit the EU.

The Bank, which had warned a Brexit vote could tip the UK into recession, has upped its growth forecasts since the EU referendum and its latest quarterly inflation report will be keenly awaited for any further tweaks.

Britain's surprising resilience is likely to put further scrutiny on the Bank's policy path, given that strong growth and surging inflation would normally lead to interest rate rises.

Bank governor Mark Carney said in January that rates could go up or down in the months ahead as the country enters a period of higher consumer price inflation.

This comes as a marked shift after last August's move to halve rates to 0.25%, when the Bank also said more cuts were on the cards.

Financial markets are now pencilling in a 50% chance of a rate hike by December as the Brexit-hit pound is set to send inflation rocketing past the Bank's 2% target.

Consumer Price Index (CPI) inflation hit a two-and-a-half year high of 1.6% in December, up from 1.2% in November.

But economists believe growth will gradually deflate this year as inflation sees consumers rein in their spending and businesses put investment on hold.

The Bank has also stressed it is prepared to "look through" inflation rising potentially above 3% in the second half, rather than damaging economic prospects with a rate rise.

Howard Archer, chief economist at IHS Global Insight, said: " 2017 is likely to be an increasingly difficult year for the UK economy.

"Like a slow puncture, we suspect that the economy will gradually lose air as the year proceeds."

He is forecasting a slowdown in growth to 0.4% in the first quarter, easing slowly further as the year progresses.

After annual growth of 2% in 2016, he sees the economy slowing to 1.4% in 2017.

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