By William Schomberg and Christina Fincher
LONDON (Reuters) - The Bank of England left monetary policy unchanged on Thursday but made no new attempt to talk down borrowing costs in financial markets, prompting investors to add to bets it will raise interest rates sooner than it has suggested.
The central bank opted not to repeat its warning of July - made a few days after Mark Carney took over as governor - that investors were getting ahead of themselves.
"Under Carney, the Bank of England has found communicating with the markets challenging and might now be favoring a quieter rather than louder approach," said Victoria Clarke, an economist at Investec bank.
Yields on five and 10-year British government bonds hit two-year highs shortly after the monthly policy announcement. Short-sterling prices showed investors brought forward their expectations for a rate hike.
As expected, the central bank 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.
In August, the BoE launched a new forward guidance plan to keep rates on hold until Britain's unemployment rate falls to 7 percent, something the bank expects only in late 2016.
Signs of a surprisingly strong recovery in the economy, while a welcome change for policymakers, have added to skepticism in financial markets about the BoE's ability to keep rates at its low for so long.
Many investors have predicted that a first rate hike could come in mid-2015.
Strong manufacturing and services surveys this week prompted some economists to predict that growth in the third quarter could speed up to more than 1 percent, much stronger than the BoE's forecast of about 0.6 percent.
Rising market interest rates have raised the prospect of higher borrowing costs for consumers and companies that could hamper the still incipient recovery.
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.
At the BoE, the recent run of stronger economic data from Britain and in its important European export markets may have added to disagreements among policymakers.
"The MPC (Monetary Policy Committee) has decided not to try and push back on (rising market interest rates) as it attempted in its statement released in July. That seems to suggest that the Committee, or enough members of it, are inclined to view some of the tightening in conditions as increasingly looking warranted by the much better UK data-flow," said BNP Paribas economist David Tinsley.
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 last week said 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.
Minutes of September's meeting are due to be published on September 18, with the usual lag of nearly two weeks.
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.
The BoE's September policy meeting unusually took place on Tuesday and Wednesday to allow Carney to attend the Group of 20 summit in Russia which started on Thursday. ($1 = 0.6399 British pounds)
(Additional reporting by David Milliken)