Bank of England keeps rates steady, policy split widens

By David Milliken and Suban Abdulla

LONDON, Dec 19 (Reuters) - The Bank of England kept its main interest rate unchanged at 4.75% on Thursday but policymakers became more divided about whether rate cuts were needed to tackle a slowing economy.

Three of the BoE's nine-person Monetary Policy Committee - Deputy Governor Dave Ramsden and external members Swati Dhingra and Alan Taylor - voted for a quarter-point rate cut to 4.5%.

Economists polled by Reuters had expected only one MPC member to vote for a cut.

But BoE Governor Andrew Bailey said the central bank needed to stick to its existing "gradual approach" to cutting rates.

"With the heightened uncertainty in the economy we can't commit to when or by how much we will cut rates in the coming year," he said.

Economists polled by Reuters last week forecast the BoE would cut rates four times next year, but financial markets have scaled back their expectations sharply in response to faster than expected wage growth and only see up to two cuts.

The BoE has been less willing to cut rates than either the U.S. Federal Reserve or the European Central Bank, reducing rates by just half a percentage point this year.

Official figures on Wednesday showed British consumer price inflation rose to 2.6% in November - the highest in the Group of Seven rich economies by a small margin, and slightly higher than the BoE itself had forecast last month.

"Headline inflation is expected to continue to rise slightly in the near term," the BoE said.

However, the central bank also cut its growth forecast for the final quarter of this year to zero from a 0.3% forecast just six weeks ago.

Britain's economy contracted in September and October - the first back-to-back monthly falls in output since 2020 - according to official data last week and business sentiment has tumbled since finance minister Rachel Reeves announced a 25 billion pound tax hike for employers in her Oct. 30 budget.

MPC members who backed keeping rates on hold said it remained "particularly uncertain" whether these higher costs would be passed on to consumers through higher prices or lead to job losses and slower pay growth.

"Recent developments added to the argument for a gradual approach to the withdrawal of policy restrictiveness, while eschewing any commitment to changing policy at a specific meeting," they said.

The three MPC members who voted to cut rates said a "very restrictive" policy stance risked pushing inflation too far below its 2% target in the medium term and creating an unduly large amount of spare capacity in the economy.

(Reporting by David Milliken and Suban Abdulla)

((david.milliken@thomsonreuters.com))

Keywords: BRITAIN BOE/