Bank of England to wait out soft data as it eyes next rate rise

By David Milliken and William Schomberg

LONDON (Reuters) - The Bank of England held interest rates steady on Thursday and said it wanted to be sure the economy was recovering from a slow start to the year before it raised borrowing costs again.

In sharp contrast to overwhelming expectations a few weeks ago that they would raise rates, BoE policymakers voted 7-2 to keep them at 0.5 percent.

That was in line with forecasts from economists polled by Reuters in the past week.

The BoE trimmed its inflation forecasts and cut its growth outlook, but Governor Mark Carney said he expected the economy to recover speed, despite signs of more cautious consumers.

Overall, he said, the BoE was sticking to its message that rates would probably need to rise - for only the second time in over a decade - once that recovery was clear.

"What's the sensible thing to do? Do you act now or do you wait to see evidence that that momentum is reasserting (itself)," Carney told reporters when asked about signals from the BoE earlier this year that a rate hike was approaching.

"The judgement of the majority of the committee is you wait to see for some evidence of that reasserting."

Investors pushed back their bets on when rates would rise, and sterling slid close to a four-month low against the dollar.

Rate futures showed less than a 50 percent chance of a hike in August, the next time the BoE updates its forecasts.

Carney later told BBC television that interest rates were likely to rise by the end of this year.

Britain's economy grew more slowly than most of its peers last year, after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment.

Growth slowed even more sharply in early 2018 due to a mix of unusually icy weather and headwinds from Britain's impending European Union exit.

Recent data "had been consistent with a temporary soft patch", most of the BoE's rate-setters said. But "there was value in seeing how the data unfolded over the coming months," they added.

OVERHEATING RISK

Despite weak growth, the BoE sees the need for rate hikes because it thinks the economy could overheat due to long-term weak productivity and lower immigration driven by Brexit.

Carney said in February that rates might go up sooner than the BoE had previously suggested, and was asked by a reporter on Thursday about the description of him as an "unreliable boyfriend" - first used by a British lawmaker because of his previous signals about when rates might rise, which misfired.

"The only people who throw that term at me are in this room," Carney told the news conference.

However, JP Morgan economist Allan Monks said the BoE had sent a "muddled message" about its intentions.

James Smith at ING said the approach of crunch negotiations about Britain's post-Brexit trade deal with the EU could make it hard for the BoE to raise rates later this year.

Policymakers Ian McCafferty and Michael Saunders, who again voted for a rate rise, agreed the weak growth so far this year reflected "temporary or erratic factors", but said delaying a rate hike risked more abrupt tightening later on.

The BoE said weaker inflation was due to a faster fading of the impact of sterling's plunge on import prices, and that domestic inflation pressures continued to rise.

Inflation was seen dropping to 2.1 percent in a year's time, and returning to target a year later, but only if interest rates rose by 25 basis points about three times over three years, as markets expect.

The BoE said the economy would grow by 1.4 percent this year, down from the 1.8 percent it predicted in February, with slowing consumer lending and a sluggish housing market creating greater-than-usual uncertainty about consumer demand.

For 2019 and 2020, it predicted growth of 1.7 percent, down from 1.8 percent in its February forecasts.

(Editing by John Stonestreet and Hugh Lawson)