Bank of England: disorderly Brexit risk reduced by EU talks progress

LONDON (Reuters) - Last week's breakthrough in Brexit talks has reduced the risk of a disorderly British departure from the European Union and may boost economic confidence, the Bank of England said on Thursday after it left interest rates unchanged.

BoE policymakers voted unanimously to keep rates at 0.5 percent, as expected, a month after raising them for the first time in more than a decade as inflation approached its highest level in nearly six years.

Sterling fell against the dollar and 10-year British government bond yields touched a three-month low, however, as markets got no sense that the BoE would speed up its rate hike plans.

Domestic data suggested the economy might be slowing slightly into the end of the year, and Brexit remained a big uncertainty going forward, the central bank said.

But it drew positive conclusions from finance minister Philip Hammond's annual budget in November - which it said would boost growth slightly over the next few years - as well as from developments in Brexit talks.

Prime Minister Theresa May secured agreement from the European Commission last week that Britain had made sufficient progress in preliminary talks to move on to negotiating a transition agreement and a longer-term trade deal.

"This would reduce the likelihood of a disorderly exit, and was likely to support household and corporate confidence," the BoE said, adding that it would consider progress on Brexit more closely when it updates its forecasts in February.

May is in Brussels on Thursday to get EU national governments to sign off on last week's deal.

BoE Governor Mark Carney has previously faced criticism from Brexit supporters for focusing on the risks of leaving the EU.

GRADUAL RATE RISES

The BoE's Monetary Policy Committee stuck to its view from last month that interest rates were only likely to need to rise gradually.

"The committee remained of the view that, were the economy to follow the path expected in the November Inflation Report, further modest increases in Bank Rate would be warranted over the next few years," the BoE said.

The BoE decision comes the day after the U.S. Federal Reserve raised interest rates for a third time this year, and shortly before the European Central Bank was due to make a statement on monetary policy.

"We expect that the MPC will raise interest rates again next year but there were no hints today as to when that will occur. We think August 2018 is the most likely date for the next hike," said Rhys Herbert, a senior economist at Lloyds Bank.

Economists polled by Reuters had mostly expected a 9-0 vote in favor of leaving policy unchanged from the Monetary Policy Committee after last month's rate rise. The BoE said this marked the start of a very gradual tightening cycle as the economy comes close to running at full capacity.

Inflation hit its highest level in nearly six years in November at 3.1 percent, and the jobless rate remains at the lowest since 1975, even though the outlook for growth is soft.

Last month the BoE said it expected the economy to grow by 1.6 percent next year, unchanged from what it expects for 2017 and somewhat faster than the government and most economists polled by Reuters expect.

Both financial markets and economists mostly expect the BoE to wait nearly a year before raising interest rates again.

Figures overnight pointed to the weakest housing market since 2013 but retail sales data earlier on Thursday were unexpectedly strong, as shoppers pounced on Black Friday bargains.

The BoE said inflation was now near its peak and reiterated its view that above-target price growth was almost all due to sterling's fall after June 2016's Brexit vote. It expects inflation to fall slowly next year.

Wage growth - which many BoE policymakers view as a good guide to medium-term inflation pressures - remains slow, with regular pay in the three months to October up just 2.3 percent on a year earlier.

However, the BoE said this was in line with expectations, unlike in previous years when it had disappointed, and that slack in the economy was being steadily eroded.

(Editing by Jon Boyle)