* Some on MPC think rate rise decision now "more balanced"
* Easter helps retail sales to fastest growth since 2004
* MPC says low rates could distort housing market
* Pound at 5 1/2-yr high, gilt/Bund spread widest since 1998
* Reuters poll shows economists still see Q2 rate rise
(Adds Reuters interest rate poll)
By David Milliken and Ana Nicolaci da Costa
LONDON, May 21 The Bank of England appears to be
a step nearer to raising interest rates, with some of its top
officials starting to say the case for keeping rates on hold is
now more finely balanced.
BoE Governor Mark Carney, who so far has had the backing of
all of the Bank's eight other monetary policymakers in keeping
interest rates at a record low, said last week that the Bank was
only edging towards an increase in borrowing costs.
Forecasts he presented suggested no hike for around a year,
and most economists in a Reuters poll published on Wednesday
shared that view.
But more than a third said rates could rise in the first
three months of next year or earlier, and some expect one or two
of the nine members of the BoE's Monetary Policy Committee to
vote for a rate rise within just a few months.
The prospect of a split on the MPC was backed up by minutes
of the its May policy meeting.
"For some members, the monetary policy decision was becoming
more balanced," the minutes said. "It could be argued that the
more gradual the intended rise in Bank Rate, the earlier it
might be necessary to start tightening policy."
Sterling hit a five-and-a-half year high on a trade-weighted
basis after the minutes and and a report that showed a surge in
British retail sales in April.
The gap between British and German 10-year interest rates
rose to its highest in over 15 years as investors added to bets
that the BoE would raise rates well before the euro zone.
"The debate is clearly shifting in favour of moving rates in
the not too distant future," said George Buckley, a UK economist
at Deutsche Bank.
The BoE has kept interest rates at a record low 0.5 percent
since March 2009, and the entire MPC want to see the economy
running at closer to full capacity before they go up.
When rates do start to rise, Carney has stressed that
increases will be gradual, and to a level much lower than before
the crisis, when BoE rates were around 5 percent.
But Britain's economy has picked up much more quickly than
expected over the past year. The BoE now forecasts growth of 3.4
percent for 2014, which would be the highest rate since 2007.
Figures on Wednesday showed retail sales jumped 6.9 percent,
their biggest rise since May 2004, aided by a late Easter.
"The figures will support the feel-good feeling about the
economy, but there is little sign of inflationary consumer
overheating that could concern the BoE here," said Lena Komileva
at G+ Economics, a consultancy.
RATE TIMING STILL UNCERTAIN
It remains far from certain that a majority of the MPC would
back an early rate rise, especially as three of its nine members
are due to replaced over the next three months.
The minutes showed continued disagreement about how much
slack is left in Britain's economy and how rapidly growth will
use it up. Policymakers also noted a premature rate rise could
choke off growth, and said there was little sign inflation would
exceed its 2 percent target in the foreseeable future.
Rather than raise rates, the BoE may take steps through its
Financial Policy Committee to curb the effects of low rates on
Britain's housing market. The MPC noted that its commitment to
keep rates low could distort the market and said the FPC might
take steps to mitigate that when it meets next month.
House prices have risen by around 10 percent over the past
year, and both Carney and Prime Minister David Cameron have
called housing the biggest domestic risk to financial stability,
possibly paving the way for moves to cool demand.
On Tuesday, Lloyds Banking Group said it would stop
lending at multiples above four times a borrower's income for
mortgages of over 500,000 pounds ($842,400) to reduce its
exposure to London, where prices are rising fastest.
Tighter mortgage rules came into force in April and mortgage
approvals and the number of homes up for sale have fallen in
recent months. The MPC said it was too soon to know if the rules
were having an impact.
Wednesday's Reuters poll showed that 27 out of 30 economists
believed that the BoE is right to use the FPC's tools rather
than higher interest rates to curb housing market excesses.
($1 = 0.5935 British Pounds)
(Additional reporting by Belinda Goldsmith; editing by William
Schomberg and Jeremy Gaunt)