By Yoruk Bahceli and Amanda Cooper

LONDON, Nov 7 (Reuters) - Sterling rallied sharply on

Thursday, solidifying its position as the best performing major

currency of 2024, while UK-focussed stocks rose, after the Bank

of England cut rates, but indicated future cuts may be more

gradual than many had thought.

The BoE, which delivered its second rate cut since 2020,

said that after Labour Party finance minister Rachel Reeves'

high-tax, high-spend budget last week, it expected higher

inflation and growth.

London-listed shares of mid-sized companies touched session

highs, while UK government bonds headed for their best

one-day performance in almost a month, reflecting investor

demand for sterling-denominated assets.

Sterling rose by as much as 0.68% to $1.2967 after the

decision, while two-year gilt yields fell 3 basis

points to 4.482%, as bond prices rose.

The Monetary Policy Committee (MPC) voted 8-1 to cut rates

to 4.75% from 5%, a stronger majority than expectations in a

Reuters poll for a 7-2 vote in favour of a cut.

The BoE predicted last week's budget, which contained big

increases in tax, spending and borrowing - would boost the size

of Britain's economy by around 0.75% next year but barely

improve annual growth rates in two or three years' time.

It said the budget was likely to add just under half a

percentage point to the rate of inflation at its peak in just

over two years' time, causing inflation to take a year longer to

return sustainably to its 2% target.

Right now, money markets show traders believe UK rates could

fall by just over half a percent next year - something

economists and analysts believe is too tame, given the BoE's

predictions predate the rise in gilt yields and the shift in

market borrowing rates following the budget.

"Remember, markets are pricing fewer than three rate cuts

from here on in," James Smith, developed markets economist - UK,

at ING said.

"We don't think that sounds particularly realistic. Our view

is that rate cuts will be cut at every meeting from February

until rates reach 3.25% next autumn."

British inflation has proven far more stubborn than that in

other developed nations, particularly where wages and the

services sector are concerned.

As such, UK rates remaining higher for longer and then

falling more slowly than elsewhere has been a key driver of

sterling strength this year.

The pound is the best-performing major currency against the

dollar this year, up nearly 2% with Thursday's rally.

(Additional reporting by Samuel Indyk; Editing by Alun John and

Dhara Ranasinghe)