• BoE cuts rates to 3.75% in tight 5-4 vote
• Governor Bailey supports rate cut, shifting MPC balance
• Sterling rises, bond yields increase post-BoE decision

LONDON, Dec 18 (Reuters) - The British pound reversed an earlier fall on Thursday even though the Bank of England cut interest rates further, as policymakers were divided and hinted there was limited space for more easing.

The BoE's rate-setting Monetary Policy Committee voted 5-4 to lower borrowing costs by a quarter-point to 3.75%, its fourth rate cut this year, but it signalled it would continue to cut interest rates gradually.

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The pound , which had been lower earlier in the day, reversed course and was last up 0.1% at $1.3381.

Against the euro, the pound was up 0.2% at 87.56 pence.

BOE'S MPC DIVIDED

The MPC has been almost evenly split for two straight meetings, after voting by five to four to keep interest rates on hold last month.

Governor Andrew Bailey changed his view this time around by voting for a cut, tipping the balance on the committee.

"We still think rates are on a gradual path downward," Bailey said in a statement. "But with every cut we make, how much further we go becomes a closer call."

Markets trimmed their expectations for further easing following the decision.

The next rate cut is now not fully priced until the June 2026 meeting, whereas previously it had been expected by April.

"If there is a reaction in sterling to rally, it will be perfectly predictable,” said Neil Parker, head of economics and market strategy at Moneycorp.

UK government bond yields climbed after the decision, with the benchmark 10-year gilt yield rising 3.5 basis points to 4.517%.

The two-year yield , which is sensitive to changes in BoE policy expectations, rose 5 bps to 3.768%.

The moves in bond yields and the currency largely reversed a fall the day before after UK inflation in November was softer than expected.

British consumer price inflation fell to 3.2% in November, its lowest since March, data showed on Wednesday. The median forecast in a poll of economists surveyed by Reuters had been for a decline to 3.5%.

In a busy day for central banks in Europe, Sweden's Riksbank and Norway's Norges Bank both kept their policy rates on hold, while the European Central Bank is expected to keep its deposit rate on hold when it announces policy later.

https://www.reuters.com/world/uk/sterling-steady-before-expected-boe-rate-cut-2025-12-18/