LONDON, May 19 (Reuters) - Sterling eased on Monday, on growing talk the Bank of England will step in to cool the UK housing market, which would allow the central bank to keep interest rates lower for longer to sustain recovery elsewhere in the economy.
BoE Governor Mark Carney at the weekend gave his strongest warning to date about the risks of a housing bubble and said the central bank was looking at new measures to control mortgage lending in a housing market which is short of supply.
Britain's housing market has made a swift recovery, with prices up about 10 percent in the past 12 months. That has put the spotlight on the BoE's ability to prevent a bubble forming without raising rates sooner than it was planning for fear of derailing the recovery in the wider economy.
Speculation is widespread that the BoE's Financial Policy Committee could tighten mortgage lending rules when it meets on June 17.
That will ease the pressure on the BoE's Monetary Policy Committee to raise interest rates and could hurt sterling in the short run. Currently, traders are pricing in the chance of a rate rise in the first quarter of 2015.
Sterling slipped against a struggling dollar, trading at $1.6813, well below its recent near-five-year highs of $1.6997 . It was down against the euro with the single European currency up 0.1 percent at 81.55 pence.
"We maintain a tactical short sterling/dollar position," Morgan Stanley analysts said in a note. "In the $1.6650/30 area, we would look to switch back to bullish strategies."
Talk that a proposed merger between Britain's AstraZeneca and U.S. drugmaker Pfizer might not go through was also weighing on the currency. Completion of the merger would mean Pfizer having to buy pounds to pay British shareholders, hopes of which had supported the pound in the past few weeks.
Minutes from the MPC's latest meeting and April CPI inflation data are due in the coming week.
"Sterling bulls are hoping that MPC hawks including (Martin) Weale may start voting to increase the BoE's base rate," said Mansoor Mohiuddin, head of currency strategy at UBS.
"The minutes will be closely followed to see if all nine MPC members continued to vote for unchanged policy. But the UK data isn't showing inflation picking up, despite the strength of the economic recovery."
April inflation data is due on Tuesday. Annual inflation is expected to rise to 1.7 percent from 1.6 percent a month earlier, but still well below the BoE's target of 2 percent. A lower-than-expected number will add to expectations that the BoE will keep rates low.
Last week the central bank's quarterly inflation report and accompanying remarks by Governor Carney suggested a rate hike may not happen quite as soon as many had anticipated.
Still, the UK economic picture painted by recent data was brighter than that of the euro zone and United States, analysts said, making the pound attractive whenever it retreats.
Reporting by Anirban Nag; editing by Keiron Henderson