By William Schomberg and Christina Fincher
LONDON (Reuters) - The Bank of England made no new attempt to talk down borrowing costs in financial markets on Thursday, prompting investors to pile on bets that it will raise interest rates sooner than it has suggested as growth picks up.
The BoE left monetary policy unchanged at its third monthly meeting under new governor Mark Carney and opted not to repeat its warning of July that investors were getting ahead of themselves by pushing up bond yields.
Yields on 10-year British government bonds broke through the 3 percent level for the first time in more than two years after the decision, pushed up also by strong U.S. economic data that reinforced expectations the Federal Reserve could start scaling back its stimulus program as soon as this month.
Investors are now pricing in a first BoE rate rise in December 2014, as opposed to March 2015 before the policy statement, based on short-sterling contracts, Simon Peck, a rates strategist at RBS in London said.
Short-sterling contracts for December 2014 fell by 14 ticks and sterling hit a 7-1/2 month high against a trade-weighted basket of currencies on Thursday.
The BoE, under its forward guidance plan issued last month, expects to keep rates on hold until unemployment falls to 7 percent, something it expects only in late 2016.
Simon Hayes, an economist with Barclays, said investors overreacted to the BoE's decision to issue no statement which was not necessarily a sign that some policymakers agreed with the way markets were pricing in a first rate hike by the bank.
"I think they have got the wrong end of the stick," Hayes said, adding it was more likely the BoE did not see the rise so far in market rates as a threat to the economy.
"I don't think for a moment that having given rate guidance in August, on the strength of some recent data they are getting cold feet about it."
Recent surveys on UK manufacturing and services have been strong and economists this week predicted that economic growth in the third quarter could accelerate to more than 1 percent, much stronger than the BoE's forecast of about 0.6 percent.
The European Central Bank is facing a similar challenge. It said in July it would keep interest rates unchanged or cut them further, only for signs of growth to pick up soon after, pushing up some borrowing costs in financial markets.
As expected, the BoE kept interest rates at a record low of 0.5 percent and made no change to its asset purchase program under which the BoE has spent 375 billion pounds' ($586 billion) on British government bonds.
Michael Saunders, an economist at Citi, said the MPC's silence on Thursday probably reflected its reluctance to revive its bond-buying program in order to manage market rates, and it would hold fire until rates threatened to hit growth hard.
"With the recent string of upside surprises in data, that pain threshold has probably not yet been reached. Markets may seek to test exactly where it is," he said.
Minutes of the BoE's September meeting are due to be published on September 18, with the usual lag of nearly two weeks.
In August, one member of the MPC voted against the forward guidance plan out of concern it would undermine the bank's inflation-fighting credibility. Others said there was probably a case for buying more government bonds in the future to give the recovery an extra boost.
A couple of MPC members might now have voted to pump more money into the economy, economists said, speaking before Thursday's MPC announcement. Carney said last week that the BoE might give more help to the economy if the recent rise in market interest rates added to risks for the recovery.
But the recent signs of stronger growth have probably reinforced the opposition of the majority to more bond-buying.
Also on Thursday, the bank said it will reinvest proceeds from 1.9 billion pounds worth of maturing British government bonds from its stock of gilts bought under the program, buying gilts evenly across three maturity ranges.
($1 = 0.6399 British pounds)
(Additional reporting by David Milliken; Editing by Susan Fenton)