By Reuters

(Reuters) - The Bank of England's nine interest rate-setters voted unanimously on Thursday to keep borrowing costs on hold in the face of inflation risks from the war in the Middle East, and some raised the prospect of raising rates, triggering an aggressive sell-off in short-dated gilts.

Sterling remained higher on the day, at around $1.3297 and at around 86.30 ​pence per euro.

Two-year gilt yields were up 27 basis points on the day at 4.38%, around one-year highs.

According to money markets, traders now price in ‌two 25-bp rate hikes by year-end. Prior to the meeting, they had fully priced in one rate hike this year and a roughly 50/50 chance of a second .

COMMENTS:

LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON:"The message is more hawkish than the market had been anticipating, with the BoE indicating that if the energy price shock looks to be more persistent then they have to act to tighten policy to stop inflation expectations becoming ​unanchoredThe situation is very uncertain, but the messaging is they certainly look more likely to respond than say the Fed."

JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES INVESTMENT SERVICES, FRANCE:"The ​question asked prior to the meeting’s commencement was whether the conflict might delay anticipated rate cuts, prevent them indefinitely, or even cause them ⁠to be reversed. Fast-moving developments have resulted in skittish financial markets edging to the latter position, but not imminently. As ever, senior Bank officials have a tightrope to walk. While sustained ​high energy prices would cause price pressures to rise, the UK economy has continued to struggle at the outset of the year and hardly needs a policy tightening which might only ​serve further to limit any revival down the road."

“What is striking is that all policymakers voted to keep policy on hold, which shows that even the more dovish members of the committee want to see how this conflict plays out before cutting again. With today’s labour market data showing wage growth is continuing to moderate, there is certainly a strong case for bringing rates down ​eventually. But with the inflation outlook now looking more challenging, the Bank will be focused on keeping inflation expectations pinned down. So while the hurdle to a return to rate ​hikes is very high, the economy could be facing a long wait until the next cut.”

"After months of division, the Committee is now more united in ‌holding rates steady, ⁠voting a unanimous 9-0 versus February’s tight 5-4 split.""Policymakers have converged on controlled caution. The question is how long the economy can afford to wait. In turn, a dovish BoE stance is likely to keep a lid on sterling gains, especially if investors continue to seek out the dollar as a safe haven.”

"9-0…is a sensible result. Extremely sensible. I thought it might be 7-2. Any judgement on whether rates should go up or down - which are both possible next outcomes - are simply a function of how long the ​war lasts and at this stage, there's ​no basis to make that judgement beyond ⁠pure speculation. In which case, it is absolutely prudent that the Bank of England allows markets to do their job, which is to adjust to information in real time, and to allow for both possibilities and this does that."

"Given ​the UK’s backdrop of weak growth and slowly receding inflation, a prolonged 'wait‑and‑see' approach through the rest of the year would be defensible. ​We expect the BoE ⁠to delay its next rate cut until December.”

"The Iranian war has certainly made decisions far more difficult for a divided MPC (Monetary Policy Committee), who for now are more in favour of seeing how the situation develops, giving themselves time to assess both the growth and inflation dynamics."

"It’s fair to say that we have seen a reversal in the outlook ⁠for UK ​rates, and that the chances of a rate hike from the BoE over the coming months have increased."

"Much will now depend on how high energy prices go, and for how long they remain elevated. But the current levels of oil and gas prices are already enough to add around 1% to ​headline inflation in the coming months, while shortages of fertilisers could push food inflation higher later in the year."