Bank of England seen split, but no rate hike for now

LONDON Wed Aug 6, 2014 7:01pm EDT

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LONDON Aug 7 (Reuters) - The Bank of England looks likely to start the ball rolling towards its first interest rate hike since 2007 when it wraps up a policy meeting on Thursday.

The two-day meeting is likely to have produced the first split over rates in more than three years, with at least one member of the Monetary Policy Committee (MPC) voting for higher borrowing costs, according to a Reuters poll.

But despite strong economic growth, the BoE looks set to announce at 1100 GMT that it is keeping its benchmark Bank rate at a record-low 0.5 percent, according to every forecast in a Reuters poll of 55 economists

Investors will have to wait nearly two weeks to know if the MPC's unity has indeed come to an end. Minutes of the meeting are due to be published on Aug. 20.

With Britain's economy set to grow by more than 3 percent this year, the BoE is widely expected to be the first central bank in a major developed economy to raise rates.

Markets expect a first hike to come either late this year or early in 2015. The speculation has pushed up sterling by more than 10 percent against a basket of currencies in the 12 months to early July, although it has fallen back a bit since then.

Some MPC members have said the time is coming to ease off on stimulus after unemployment tumbled to 6.5 percent in the three months to May from 7.8 percent a year earlier.

But others on the MPC point to very slow growth in wages as a sign that the recovery in the labour market has further to run before it starts to push up inflation, which was below-target at 1.9 percent in June.

The BoE is expected to lower its forecasts for wage growth when it produces quarterly economic projections next week.

Charles Goodhart, a former MPC member, said uncertainty about how much more unemployment can fall without pressuring prices meant the BoE should hold its fire for now.

"When you're in uncharted waters, to use that horrible cliche, probably the best thing to do is not pretend you actually know what the chart says," he said, speaking at a policy discussion organised by Fathom Consulting on Tuesday.

Signs that Britain's economy may have lost some of its momentum may also reduce the likelihood of a rate hike as soon as this year. Growth in the country's massive services sector remains strong but manufacturing stumbled in May and June.

Other risks to Britain's recovery include a worsening of tensions in Ukraine which could hurt demand in Europe, and the shock if Scotland votes to leave the United Kingdom in a referendum on Sept. 18. (Editing by Louise Ireland)

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