LONDON, Feb 1 (Reuters) - The Bank of England kept interest rates at a nearly 16-year high on Thursday but softened its stance about when it might cut them and one of its policymakers cast the first vote for a reduction in borrowing costs since 2020.
The BoE's Monetary Policy Committee split three ways on the right course for policy and ditched its warning that rates could rise again, instead saying borrowing costs would be kept "under review".
Six of the nine MPC members voted to keep rates at 5.25%. Jonathan Haskel and Catherine Mann opted voted for a 0.25 percentage-point hike, while Swati Dhingra voted for a cut of the same size.
It marked the first time since August 2008 - early in the global financial crisis - that different policymakers have voted to move interest rates up and down at the same meeting.
Market reaction was muted, with the pound and British government bond yields rising modestly. Investors slightly reined in bets on the extent of cuts to Bank Rate over 2024.
"We are beginning to see signs that the BoE may move soon as there was a vote at today’s meeting for a cut," Lindsay James, investment strategist at Quilter Investors, said.
Economists polled by Reuters had expected one policymaker to vote for a rate rise, and for the remainder to vote to keep rates on hold.
"We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates," BoE Governor Andrew Bailey said.
But in a softening of its language on the outlook for interest rates, the BoE dropped its warning that "further tightening" would be required if more persistent inflation pressure emerged.
Instead, the BoE said it would "keep under review for how long Bank Rate should be maintained at its current level".
Officials at the U.S. Federal Reserve and European Central Bank have been more explicit that rate cuts are on the agenda.
Late on Wednesday the Fed said its rates had peaked and would move lower later this year.
The BoE reiterated that policy would need to stay "restrictive for sufficiently long" - even as it slashed its inflation forecast for the coming months.
However, considerably higher wage growth set Britain apart from its peers in driving inflation pressure over the longer term, the BoE said.
Annual consumer price inflation now looks likely to return to 2% in the second quarter of this year, albeit briefly, in a sharp downgrade of the BoE's near-term outlook for price growth compared with November's projections.
But the medium-term forecast - based on a much lower market path for interest rates than in November - showed inflation would rise back above 2% in the third quarter of 2024 and not return to target until late 2026, a year later than the BoE had forecast in November.
The BoE stuck to its view that Britain's economy will struggle to generate much economic growth in the quarters ahead, despite a modest upgrade to the annual growth projections.
In a small boost for finance minister Jeremy Hunt, the BoE judged that his tax cuts announced in November would boost British economic output slightly in the years ahead.
But the central bank largely maintained its forecast for weak household income growth after tax and inflation, with the cost of living a key issue ahead of a likely national election this year.
Households' living standards have fallen over the past two years due to high inflation, contributing to the electoral challenge facing Prime Minister Rishi Sunak.
Hunt is preparing a budget to be delivered on March 6 that is likely to include tax cuts in a pre-election bid to woo voters back to the Conservative Party, which is lagging badly behind the opposition Labour Party in opinion polls.
Earlier this week the International Monetary Fund warned Hunt not to cut taxes, due to high levels of public debt and growing demands on services, and trimmed its outlook for British economic growth in 2025.
Reporting by David Milliken, Andy Bruce and Suban Abdulla; Editing By William Schomberg
