LONDON - Sterling edged lower against the dollar on Thursday ahead of a Bank of England policy meeting, with the central bank expected to hold rates steady but flag when it intends to lower the cost of borrowing.

According to LSEG data, money markets are pricing in an almost 95% chance that the BoE will hold its benchmark interest rate at 5.25% - the highest since 2008, but investors will be watching for signs of when the first interest rate cut in four years will come as inflation falls.

Markets now see a 56% chance of such move in June - when the European Central Bank has already signalled it will reduce borrowing costs, and a greater chance of 72% of a BoE rate cut in August.

"It’s widely anticipated they’ll leave rates unchanged at 5.25%, where they’ve been since August. So the focus will instead be on the vote split, their new forecasts, and what their forward guidance signals about potential cuts in the future," said Jim Reid, strategist at Deutsche Bank.

Sterling fell 0.15% to $1.2479, moving away from a three-week high of $1.2709 touched on Friday.

Against the euro, the UK currency edged 0.06% lower, trading close to a two-week low touched against the single currency on Wednesday.

According to most economists polled by Reuters, members of the BoE's Monetary Policy Committee will probably vote 8-1 for a second time in a row to keep Bank Rate on hold.

Interest rate cuts would be welcome for Prime Minister Rishi Sunak ahead of an election expected this year. He has told voters that the economy is turning a corner, but he is struggling in opinion polls against the opposition Labour Party.

The BoE rate decision is due at 1100 GMT, the central bank Governor Andrew Bailey and other officials will hold a press conference at 1130 GMT.

(Reporting by Joice Alves; Editing by Susan Fenton)