Bank of England chief economist votes for rate rise, boosting chance of August hike

By David Milliken and Alistair Smout

LONDON (Reuters) - The Bank of England bolstered expectations that it will raise rates for only the second time since the financial crisis at its next meeting in August, after its chief economist unexpectedly joined the minority of policymakers calling for a hike.

The central bank also set out new guidance on when it might start to sell its 435 billion pounds ($574 billion) of British government bonds, saying this could come once rates have reached around 1.5 percent, sooner than previous 2 percent guidance.

Short-dated government bond yields jumped on the news and sterling rallied by more than half a cent against the U.S. dollar on the prospect of tighter monetary policy.

"This all suggests that an August rate hike is ... more likely than not," ING economist James Smith said. "While the Bank hasn't offered any firm signals or commitments ... the overall outlook and tone suggests they'd still like to raise rates (if) the data allows."

Last month the BoE had said it wanted to see signs of stronger growth before it prepared to raise rates, in contrast to the United States where the Federal Reserve has raised rates twice this year and plans to do so twice more.

The BoE's Monetary Policy Committee (MPC) voted 6-3 this month to keep rates at 0.5 percent, where they have been for most of the past decade, in contrast to economists' expectations in a Reuters poll for a continued 7-2 split.

Chief economist Andy Haldane joined long-term dissenters Michael Saunders and Ian McCafferty in calling for rates to rise to 0.75 percent, due to concerns that recent pay deals and labour demand could push wages up faster than expected.

This opens the door for a rate rise in August, something expected by most economists in a Reuters poll but which market pricing of one set of rate futures before the meeting viewed as a less than 50 percent probability.

There was only a modest move in this measure after the decision, possibly reflecting doubts over whether Haldane's shift in view reflected the direction of other members' thinking.

The MPC as a whole said its previous view that first-quarter weakness was temporary and linked to unusually poor weather appeared "broadly on track".

Household spending and sentiment bounced back strongly, and a sharp fall in factory output in April could reflect firms having built up excess stocks during the period of bad weather in the first quarter of the year, the BoE said.

At the end of last year Britain was the slowest-growing economy among the G7 group of rich nations, as businesses held back from investing ahead of Brexit and high inflation triggered by the 2016 referendum eroded households' disposable income.

Inflation is drifting down from a five-year high of 3.1 percent hit in November, and growth in the first three months of the year was the slowest since 2012, after snow storms worsened existing weaknesses in the economy.

But with unemployment at its lowest since 1975, the BoE says the economy is running near full capacity, and that the longer-term direction for interest rates over the next two to three years is likely to be up.

Economists had expected the BoE to raise rates in May, until a string of weak data and discouraging words from BoE Governor Mark Carney in April quashed those expectations.

($1 = 0.7580 pounds)

(Writing by David Milliken)