Bank of England holds steady on rates, split seen soon

LONDON, July 10 Thu Jul 10, 2014 7:00am EDT

LONDON, July 10 (Reuters) - The Bank of England held interest rates at their record low on Thursday but the pace of Britain's recovery looks likely to split its policymakers soon over when to start weaning the economy off its support.

The Bank's Monetary Policy Committee (MPC) kept its benchmark interest rate at 0.5 percent, its level since the worst of the financial crisis more than five years ago, and made no statement.

With little sign of a slowing in Britain's surprisingly strong bounce-back from a long period of stagnation after the crisis, some BoE policymakers are expected to begin casting votes in the coming months for a first rate hike since 2007.

The BoE is broadly expected to raise rates either at the end of this year or in early 2015, probably before the U.S. Federal Reserve which on Wednesday detailed how it plans to make its own exit from the era of ultra-loose monetary policy.

Sterling hit a nearly six-year high against a basket of currencies last week, with major retail groups like Burberry and Associated British Foods on Thursday citing strains caused by a strong pound.

Still, surveys last week have shown British businesses in rude health overall and house prices are still rising rapidly, even if there are some signs that the heat in the property market is cooling.

But there have also been reminders that the economy is a long way from putting itself on the kind of footing that would support growth over the long term.

Data earlier on Thursday showed Britain's goods trade deficit with the rest of the world widened unexpectedly, underlining how exports have failed to pick up as hoped for by the BoE and the government.

And wage growth is still weak, suggesting the economy can grow further without risking a pick-up in inflation.

New additions to the nine-strong MPC have complicated attempts by economists to judge how many rate-setters are likely to be close to voting for a rate hike.

One of three new faces joining the MPC, Minouche Shafik, said on Wednesday the Bank is likely to lower its estimate of spare capacity in the economy next month, something that would suggest the time for a rate hike is fast approaching.

The BoE publishes its next quarterly Inflation Report on Aug. 13 when Governor Mark Carney and other officials will give a detailed update on their outlook for the economy.

Shafik also said she believed Britain's productivity gap - the disparity between the number of people in work and the output they produce - was unlikely to be corrected much by the return of growth, another potential signal that she might think the time for a rate hike is coming.

But she stressed that the outlook for productivity is unclear, underscoring the uncertainty about how close the Bank really is to raising rates. Shafik starts as a deputy governor of the BoE on Aug. 1. (Reporting by Andy Bruce; editing by William Schomberg and Toby Chopra)

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