LONDON (Reuters) - The Bank of England cut its growth forecast for Britain’s economy to zero in the second quarter of 2019 on Thursday and highlighted risks from global trade tensions and growing fears of a no-deal Brexit.

BoE officials voted unanimously to hold interest rates at 0.75%, despite some recent suggestions from a couple of policymakers that borrowing costs should go up sooner rather than later.

The central bank stuck to its message that rates would need to rise in a limited and gradual fashion, assuming Britain can avoid a damaging no-deal Brexit.

But the BoE noted a darkening outlook for the world economy which prompted the European Central Bank, U.S. Federal Reserve and Bank of Japan to signal this week that more stimulus could be on the way.

“Globally, trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen,” the BoE said in its policy statement.

The central bank also highlighted a growing disconnect between the “smooth” Brexit that underpins its forecasts and the market pricing in a much more chaotic exit from the EU that would hurt Britain’s economy and probably mean rate cuts.

Sterling dropped against the euro and the U.S. dollar as investors doubled down on bets that rates will not rise in the next couple of years.

FILE PHOTO: The Bank of England is seen in the financial district during rainy weather in London, Britain, September 23, 2018. Picture taken September 23, 2018. REUTERS/Henry Nicholls/File Photo

British government bond prices rallied, with September gilt futures jumping by more than 35 ticks to a session high and benchmark 10-year gilt yields falling to the day’s low of 0.809%, down more than 5 basis points on the day.

“All things considered, it’s slightly more dovish than one might have expected,” ING economist James Smith said.

He said the BoE had not stepped up its warnings that the market was underestimating the likelihood of rate rises, despite investors having pushed back their bets on the next BoE hike since May.

“The fact they are saying the perceived risk of a no-deal Brexit is rising suggests that they ultimately might take a more cautious approach than the rhetoric implied,” Smith said.

SECOND-QUARTER STAGNATION

The BoE said Britain’s economy is now on track to stagnate in the second quarter, rather than grow 0.2% quarter-on-quarter as it predicted last month. It pointed to the likely hangover from rapid stockpiling by companies earlier this year as they scrambled to prepare for the original Brexit deadline in March.

Despite the gloomier outlook for the April-June period, the BoE still expects the British economy to grow in 2019.

But a damaging no-deal Brexit would lead to a big change in the message from the Monetary Policy Committee.

“If there is a no deal then the MPC will probably quickly change its tune and support the economy by cutting interest rates,” Capital Economics economist Thomas Pugh said.

Former foreign secretary Boris Johnson is the front-runner in the race to succeed Prime Minister Theresa May. He and other contenders have said they are prepared to lead Britain out of the European Union without a deal, if necessary.

The BoE said financial conditions in Britain had loosened since May, which mechanically would feed through into stronger forecasts for economic growth, excess demand and inflation.

But it highlighted a mixed picture for inflation pressures. There are increasing signs that wage growth is leveling off, the BoE said, although the labor market remained tight.