The Bank of England signaled that the market is slightly underpricing the outlook for interest-rate increases over the next three years as long as Brexit goes smoothly.

Officials said the inflation rate will be above the 2 per cent target and rising in 2021 if the central bank, led by Governor Mark Carney, only delivers one more quarter-point hike between now and then, as investors currently expect.

In an upbeat set of forecasts, policy makers upgraded their expectations for growth, and said unemployment will fall further and the economy will generate more excess demand than previously predicted. Still, the minutes of the meeting indicated no rush to hike immediately, with a unanimous vote to hold rates defying some predictions for a split on the Monetary Policy Committee.

“There remained mixed signals from indicators of domestically generated inflation and the cost of waiting for further information was relatively low,” the minutes of the meeting said. At the same time, “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate.”

Brexit Delay

The bank’s new forecasts are the first since the deadline for the U.K. to leave the European Union was extended to October. The economy has been hobbled by the uncertainty around Brexit, leading to a year of falling investment, and the minutes said the timing and nature of Brexit remained the biggest factor for the outlook.

Still, policy makers assume a smooth transition, and the forecasts weren’t materially affected by the delay to the exit date. U.K. economic data in the short term may be volatile and difficult to interpret because of Brexit, the bank said.

Agents reported that Brexit is pushing down already weak business investment intentions. Investment will probably fall for a few more quarters, but the bank raised its forecast for investment growth through 2021.

The vote was 9-0 to hold at 0.75 per cent and to keep the asset purchase program unchanged. All 62 economists in a Bloomberg survey correctly predicted Thursday’s decision.

Stronger Growth

The forecast for GDP expansion this year was lifted to 1.5 per cent from 1.2 per cent because of a stronger first-quarter performance as companies stockpiled for Brexit. Officials now see the economy expanding 0.5 per cent at the start of the year, up from 0.3 per cent in March, with inventory building adding about 0.1 per centage point.

The growth predictions for 2020 and 2021 also went up, though that was due more to looser global financial conditions and the lower yield curve in the U.K. Unemployment, already at the lowest in four decades, will fall further, although wage gains appear to be levelling off, the bank said.

The BOE’s slightly hawkish tone sets it apart from many of the world’s biggest central banks. The Federal Reserve on Wednesday left rates on hold and said the next move could be a hike or a cut. The European Central Bank will offer new loans to help banks. The Bank of Japan last month reinforced a promise to keep rates at rock bottom.

The BOE lowered forecasts for inflation this year but kept them unchanged for two years out. The change was based on lower energy prices and a higher pound, not a different judgment on domestically generated inflation, the bank said.

Before the report, investors didn’t see the next BOE hike until well into next year, with overnight index swaps not fully pricing in a move until beyond September 2020.