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Policymakers voted 5-4 to keep rates at 4%

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Analysts had expected a 6-3 split in favour of no move

Focus

turns to Nov 26 UK budget

By Joice Alves and Naomi Rovnick

LONDON, Nov 6 (Reuters) - Investors are counting on the

Bank of England lowering borrowing costs in December after its

tight vote to leave rates unchanged on Thursday ahead of this

month's budget, which may stir up more volatility for the pound

in the weeks ahead.

The BoE's Monetary Policy Committee voted 5-4 to keep its

key rate at 4.0% as Britain wrestles with still-high inflation

and a softer labour market.

The central bank had been expected to leave rates unchanged,

although markets had attached a one-in-three chance of a cut

earlier on.

Sterling, which is around its weakest since April,

rose 0.4% in choppy trading to $1.31, having dipped to $1.306

right after the BoE decision.

Britain's 10-year gilt yield dropped 2.5 basis

points to 4.44%, below Wednesday's near-two week high. Two-year

gilt yields, which are more sensitive to rate expectations, were

down 3.8 bps at 3.77%, heading for their largest one-day fall in

two weeks.

"The fact that it was 5-4 means that (BoE Governor Andrew)

Bailey really does have the swing vote here, and the reason for

a quite muted market reaction is that focus has shifted to

December," said Neil Mehta, investment grade portfolio manager

at RBC BlueBay Asset Management.

"Bailey's comments do read more tilted towards the dovish

side."

While Bailey was among those who decided to keep borrowing

costs unchanged, he was the only one of the five who felt that

inflation risks had moved down. However, he felt there was

"value in waiting for further evidence" of this in upcoming

economic developments this year, the BoE said.

FOCUS ON THE BUDGET

By December, finance minister Rachel Reeves will have delivered

her second annual budget, which she signalled this week is

likely to contain tax rises and other measures to keep Britain's

finances on track. Policymakers will have also seen official

inflation and jobs data for October and November.

"The expectation is just joy postponed in terms of the rate

cut in December," said Amundi head of developed markets strategy

Guy Steer.

"The risks for the UK right now are about what other central

banks might do and how the Bank of England reacts," he said.

"If we're in a clear disinflationary environment in

continental Europe, the UK as well, and the U.S. cuts

aggressively, does the rate cut trajectory for the UK get sped

up?"

Money markets show traders believe the ECB is unlikely to

cut euro zone rates next year, while they expect to see at least

three cuts from the Federal Reserve by next December.

The options market on Thursday pointed to a slight

improvement in sentiment towards sterling, but still suggested

traders remained fairly negative towards the pound.

Sterling weakened a touch against the euro, which

rose 0.1% to 88.13 pence after touching its highest since May

2023 on Wednesday. London's FTSE 100 stock index was down 0.1%,

in line with European peers.