LONDON, April 30 (Reuters) - The Bank of England kept interest rates on hold on Thursday and set out scenarios for the economic impact of the Iran war, one of which could require a "forceful" increase in borrowing costs, with most policymakers voting to leave borrowing costs unchanged, which gave UK gilt prices a boost.

The pound was up 0.4% on the day at $1.353, little unchanged from where it had been before the decision and flat against the euro, which was at 86.585 pence.

Two-year gilt yields fell 10 basis points to 4.485%, from around 4.526% earlier in the day. They were still nearly 100 bps above pre-war levels.

The FTSE extended gains, to trade up 1.3% on the day from a gain of around 1% earlier.

Money markets showed traders expect the BoE to raise rates twice this year. Before the decision, they were pricing in almost three hikes in 2026. 

COMMENTS: 

NICK KENNEDY, CURRENCY STRATEGIST, LLOYDS, LONDON:    "It's a bit more dovish than expected and there is a willingness to look through the short-term noise from the war."    "It is a cautious holding pattern. They don't sound like they are in a rush right now."

LUKE BARTHOLOMEW, DEPUTY CHIEF ECONOMIST, ABERDEEN, LONDON:

"The decision to keep policy on hold today was widely expected. Instead, the market was much more interested in how the decision was communicated, especially given the hawkish lurch at the last meeting, which was subsequently walked back."

"This time the Bank has leaned heavily on its scenarios approach to describing the outlook and risks."

"We are still minded to think that the recessionary risks facing the economy will limit any second round inflation effects."

ED HUTCHINGS, HEAD OF RATES, AVIVA INVESTORS, LONDON:    "With inflation expectations on the rise and the potential to be cemented further, it's more than likely hikes will be coming, even despite the growth outlook being somewhat of a worry."     "When combining this backdrop with the on-going political noise, UK gilts have struggled. So, patience for now perhaps, but in time, overweight positions will become increasingly attractive."

DAVID REES, HEAD OF GLOBAL ECONOMICS, SCHRODERS, LONDON:

"Today sees no change to interest rates or the Bank's hawkish tone. With headline inflation rising to 3.3%, wage growth easing only gradually and services inflation still looking sticky, the risk is that this shock becomes more persistent. There is also a second-round risk later this year if the energy squeeze morphs into pressure on food prices. Higher fuel and shipping costs, plus renewed pressure on inputs such as fertiliser, could lift grocery inflation with a lag.

The risk of persistently higher inflation, along with speculation about political change after the local elections, has lifted gilt yields to near 20-year highs. Even so, the bar for hikes remains high. With some slack emerging in the labour market and growth likely to weaken if disruption drags on, we doubt the Bank will tighten unless economic activity stays strong enough to absorb it."

MADISON FALLER, GLOBAL INVESTMENT STRATEGIST, J.P. MORGAN PRIVATE BANK, LONDON:    "The BoE's hold today was no surprise, but investors should not confuse consensus with confidence. Markets may be misreading the balance of risks. Yes, the risks are two-sided. However, the speed and volatility of the repricing, from cuts to hikes, suggests investors are overweighting inflation risks from the energy shock and underweighting downside risks to growth."    "Recent moves in gilts, especially the short to intermediate part of the curve, and sterling look overdone in our view. We think investors should be positioning for that now, not chasing the hawkish narrative."

(Reporting by EMEA Markets Team; Compiled by Amanda Cooper; Editing by Dhara Ranasinghe)