* 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 (Reuters) - 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.
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)