Bank of England to keep rates on hold as investors look for rate cut hints

* BoE expected to hold rates at 5.25% at 1200 GMT

* Governor Bailey to hold press conference at 1230 GMT

* Economists see 8-1 vote split as appetite to hike wanes

* Rate cuts expected from Q2 if inflation nears 2% target

* BoE still concerned about underlying wage pressures

LONDON, Feb 1 (Reuters) - Britain's central bank looks set to keep interest rates at their highest in nearly 16 years on Thursday, but the prospect that inflation may soon be back at the Bank of England's 2% target will leave investors looking for hints of rate cuts to come.

Sharp falls in energy prices since the BoE published its last forecasts on Nov. 2 mean many economists now expect inflation - which was 4% in December - to be on target as soon as April, far earlier than the BoE's forecast of late 2025.

The risk of a slow "last mile" for inflation - which peaked at a 41-year high of 11.1% in October 2022 - prompted the BoE to warn last year that rates would need to stay high for an "extended period", and might even need to rise further.

Three of the BoE's nine policymakers voted in December for a further rise in rates to 5.5% from 5.25%, as a stagnant economy had failed to cool rapid wage growth, a key driver of medium-term inflation trends.

But this month economists polled by Reuters expect only one policymaker to vote for a rate rise - and a minority think another policymaker might vote to cut rates for the first time since March 2020.

"The tone on inflation is likely to indicate a mini victory lap with the Bank of England satisfied with the path to lower inflation. However, it may be too soon to declare victory," said Mohit Kumar, chief European economist at U.S. investment bank Jefferies, who expects one official will vote for a rate cut.

Governor Andrew Bailey will hold a press conference at 1230 GMT after the 1200 GMT rate decision, and has various options to signal a looser policy stance.

Economists polled by Reuters last month forecast the BoE would begin to cut rates in the second quarter of this year. Financial markets on Wednesday priced in a first quarter-point rate cut by the BoE in May, with rates down to 4.25% by the end of the year.

European Central Bank officials openly discussed the prospect of rate cuts last month - something the BoE has yet to do.

Late on Wednesday the Federal Reserve Chair Jerome Powell said it was likely the U.S. central bank will cut rates sometime this year, only if officials gained more confidence that inflation was moving sustainably towards the 2% target.

WEAK GROWTH

British growth has been very sluggish in recent months, with the latest official data showing the economy risks slipping into a mild, technical recession.

On Tuesday the International Monetary Fund forecast Britain's economy would grow just 0.6% this year - the second weakest in the Group of Seven advanced economies after Germany, which was also hit hard by a surge in gas prices after Russia invaded Ukraine in February 2022.

This offers a tough backdrop for Prime Minister Rishi Sunak, who must hold a national election within the next year. The possibility of further tax cuts at finance minister Jeremy Hunt's March 6 budget may be one factor which will make the BoE cautious about signalling future policy loosening.

But a bigger concern is likely to be the fear among some policymakers that wage inflation may not fall back to the rate of around 3% which economists think is needed to keep inflation close to 2% over the medium term.

Annual wage growth, excluding bonuses, was 6.6% in the three months to the end of November, and many large employers expect to give annual pay settlements in the region of 5% this year.

Higher freight costs caused by attacks on shipping in the Red Sea could also make it harder to cut rates, if conflict in the Middle East persists.

Karen Ward, chief market strategist for Europe, the Middle East and Africa at J.P. Morgan Asset Management, said the BoE may take the view that any fall in inflation below 2% risked being temporary and insufficient to justify a rate cut.

"It might be helpful for the Bank to ... state at an early stage that - just as it erred away from placing too much weight on transitory high inflation - it will also place less weight on transitory low inflation," she said. (Reporting by David Milliken; editing by Diane Craft)