By Andy Bruce, David Milliken and Suban Abdulla
LONDON (Reuters) -The Bank of England kept interest rates at a nearly 16-year high on Thursday but opened up the possibility of cutting them as inflation falls and one of its policymakers cast a first vote for a reduction in borrowing costs since 2020.
BoE Governor Andrew Bailey said inflation was "moving in the right direction" and the central bank ditched a previous warning that rates could rise again, saying instead that borrowing costs would be kept "under review".
It was the first time since 2008 that Monetary Policy Committee members had voted for both rate cuts and hikes at the same meeting. Six members voted to keep rates at 5.25%, Jonathan Haskel and Catherine Mann opted for a 0.25 percentage-point hike and Swati Dhingra backed a cut of the same size.
Economists polled by Reuters had mostly expected only one policymaker to vote for a rate rise and for the others to vote to keep rates on hold.
The pound erased earlier losses and investors trimmed bets on the extent of Bank Rate cuts but still saw four reductions in 2024, a view that Bailey said he did not want to challenge.
Bailey said it was too soon to declare victory and getting inflation down to its 2% target would not be "job done" because price growth was expected to pick up again. But he said there was a shift in the BoE's thinking.
"For me, the key question has moved from 'How restrictive do we need to be?' to 'How long do we need to maintain this position for?'" he told a press conference.
The BoE dropped its warning that further tightening would be required if more persistent inflation pressure emerged.
It also pointed out that its "extended period" for keeping policy at restrictive levels began in November - a message that BoE officials think a chunk of this period has already elapsed.
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.
Hetal Mehta, Head of Economic Research at St. James’s Place, said the BoE remained worried about underlying inflation pressures in Britain.
"We still think the BoE is likely to be behind the ECB and Fed in cutting rates," she said.
INFLATION TO FALL, WAGE GROWTH STILL STRONG
The BoE reiterated that policy would need to stay "restrictive for sufficiently long."
Despite chopping its inflation forecast for the coming months, considerably higher wage growth set Britain apart from its peers in driving longer-term inflation pressure.
There were also material inflation risks from "developments in the Middle East and from disruption to shipping through the Red Sea," the BoE said.
Consumer price inflation now looks likely to return to 2% in the second quarter of 2024, albeit briefly. In November, the BoE said that would not happen until the end of 2025.
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.
That represented a reminder to markets that their bets on rate cuts might be overdone.
The BoE stuck to its view that Britain's economy will struggle to generate much economic growth in the coming years, despite a modest upgrade to the annual growth projections.
In a small boost for finance minister Jeremy Hunt, the BoE judged that the tax cuts he announced in November - ahead of a national election expected this year - would boost economic output slightly.
But the central bank largely kept its forecast for weak household income growth after tax and inflation.
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.
On Tuesday, the International Monetary Fund warned Hunt not to cut taxes.