By David Milliken, Andy Bruce and Suban Abdulla
LONDON (Reuters) - The Bank of England stuck to its guns on Thursday and said British interest rates needed to stay high for "an extended period", a day after the Federal Reserve signalled it would cut U.S. interest rates in 2024, sparking a rally in global markets.
The Monetary Policy Committee voted 6-3 to keep rates at a 15-year high of 5.25% and Governor Andrew Bailey said there was "still some way to go" in the fight against inflation, challenging investors who have bet increasingly on rate cuts.
The three dissenting votes were in favour of raising borrowing costs and there was no talk of cutting them as the BoE remained concerned that inflation in Britain will prove stickier than in the United States and the euro zone.
The central bank largely shrugged off data this week showing a slowdown in wage growth and a 0.3% fall in gross domestic product in October - which raises the prospect of a recession in the run-up to a national election expected for 2024.
Sterling jumped by more than half a cent against the U.S. dollar, investors pushed back expectations for a first rate cut to May from March and bond prices pared some of the gains they had made in the wake of Wednesday's Fed statement.
"Successive rate rises have helped bring inflation down from over 10% in January to 4.6% in October. But there is still some way to go. We'll ... take the decisions necessary to get inflation all the way back to 2%," Bailey said in a statement.
Bailey later told broadcasters it was "really too early" to speculate about cutting rates.
The three policymakers who dissented wanted a further hike to 5.5%. For most of the others the hold decision had been "finely balanced", minutes of their policy discussion showed.
"Unlike the Federal Reserve last night, the UK's central bank is clearly much more reluctant to do or say anything that might be seen as an endorsement of market rate cut expectations," ING economist James Smith said.
The BoE's policy stance assumes a slow fall in interest rates to 4.25% in three years' time. Three hours after its announcement, investors still saw rates dropping to that level before the end of next year.
"If markets prove right in that the Fed and ECB will have started cutting in either March or April, we wouldn't rule out the BoE moving earlier too," Smith said.
STANCE UNCHANGED
The BoE's main message is unchanged from November, when it forecast it would take two years to return inflation to target.
Although inflation was likely to be slightly lower in the near term than the BoE expected last month - dropping below 4.5% at the end of the year, and to just over 4% in February - policymakers' longer-term concerns remained.
Wage inflation was "considerably higher" than in either the euro zone or the United States and British services price inflation was not on a clear downward path, the BoE said.
"The unmistakeable sub-text ... could be summed up as 'We're not the Fed - at least not yet,'" NatWest Markets economist Ross Walker said.
Economic output was expected to be "broadly flat" in the final quarter of 2023 - down from a previous forecast of 0.1% growth - and to remain stagnant over the coming quarters, in line with the central bank's previous forecast of zero growth.
The BoE noted bond yields had fallen "materially" and said it would take this into account in its next forecasts in February. Lower borrowing costs could boost growth in 2024.
Furthermore, the announcement of tax cuts last month by finance minister Jeremy Hunt was likely to boost gross domestic product by about 0.25% over the coming years, but have more limited inflation implications, the BoE added.
The only BoE policymaker to have discussed the timing of a rate cut recently is Chief Economist Huw Pill, who shortly after November's decision said the market expectation then for a first rate cut next August "doesn't seem totally unreasonable".