Traders trim UK rate cut bets as Bank of England flies blind on tariffs

By Harry Robertson and Naomi Rovnick

LONDON (Reuters) -UK markets dialled down wagers on further Bank of England rate cuts on Thursday after the central bank held borrowing costs and stressed the high levels of uncertainty facing policymakers over potential U.S. tariffs.

Gilt yields rose and the pound initially trimmed its losses. Investors also had half an eye on Finance Minister Rachel Reeves' spending statement next week and global factors from doubts about U.S. growth to rising government spending in Europe.

The BoE's Monetary Policy Committee held rates at 4.5% as expected in an 8-1 vote, with only external member Swati Dhingra voting for a quarter-point cut.

Investors had broadly anticipated a 7-2 split and took the change as one of a few signs that the BoE is in no hurry to cut again. It has cut rates three times in the current cycle.

The central bank said "there was no presumption that monetary policy was on a pre-set path over the next few meetings", although it still expected inflation pressures would continue to ease.

That has "put a little bit of doubt in minds about whether the May meeting is as live as people thought," said Matthew Amis, investment director at aberdeen.

"From here it's really data watching, and listening to what the MPC members say in the next six weeks as to whether they really build on that line in the minutes."

Short-dated government bond, or gilt, yields reversed an earlier fall and were last up two basis points at around 4.23%, from 4.15% before the decision. Yields move inversely to prices.

Money markets last priced in around 48 bps of rate cuts by year-end, versus roughly 54 bps previously.

Sterling initially rose after the decision, but was last down 0.3% at $1.2962 against a broadly-firm dollar.

UNCERTAINTY THE ONLY CERTAINTY

"It makes sense from a policymaker standpoint not to do anything when times are so uncertain," Neil Mehta, fixed income portfolio manager at RBC Bluebay, said of the BoE decision.

"When you have the policy uncertainty emanating from the U.S., policy uncertainty domestically, combined with (UK) data that still looks as if we're muddling through, it just makes sense not to do anything."

London's FTSE-100 stock index traded 0.14% lower, down slightly from the morning session but outperforming European markets where equities slid.

Reeves' Spring statement next Wednesday meanwhile poses a risk to Britain's volatile government bond market.

Ten-year gilt yields - a proxy for government borrowing costs - surged above 4.9% in January to their highest since 2008, as concerns about sticky UK inflation and high government borrowing combined with a global selloff.

Growth has been anaemic in recent months and price pressures have picked up, leading the BoE to increase its forecast for a peak in inflation this year to 3.75%. Inflation was at 3% in January.

"The Bank of England does stand out in terms of a lack of progress on inflation," said Steven Bell, managing director and chief economist for EMEA at Columbia Threadneedle.

Switzerland cut rates again on Thursday, while the U.S. Federal Reserve left rates unchanged on Wednesday.

Bell said the prospect for significant rate cuts in the UK were lower than elsewhere, making him mildly positive on sterling.

The pound rose to an almost five-month high above $1.30 earlier in the session, boosted by recent dollar weakness.

Nick Rees, head of macro research at Monex Europe, said the BoE remained in a relatively good position given it has not rushed into cutting rates and the UK is less exposed to tariffs than Europe.

"They have the advantage of being able to watch and wait and see what happens elsewhere, and then they can move a little bit later."

(Reporting by Harry Robertson and Naomi Rovnick. Editing by Toby Chopra, Dhara Ranasinghe and Mark Potter)