LONDON (Reuters) - Some Bank of England officials are moving closer to voting for an increase in interest rates, though all want to see less slack in Britain's economy first, minutes of their May 7-8 policy meeting showed on Wednesday.
The nine members of the Monetary Policy Committee voted unanimously to keep interest rates on hold, as expected by economists in a Reuters poll.
But the minutes showed that policymakers continued to be divided on how much spare capacity there was in Britain's economy, and how fast it would be eroded as the economy grew at its fastest pace in years.
"For some members, the monetary policy decision was becoming more balanced. In terms of the immediate policy decision, however, all members agreed ... it would be necessary to see more evidence of slack reducing before an increase in Bank Rate would be warranted," the minutes said.
BoE Governor Mark Carney said last week that the economy had "edged closer" to the time when the central bank would need to raise interest rates, and that the exact timing would depend on the inflation outlook and how much slack was in the economy.
Forecasts published by the BoE last week showed that an interest rate rise in about a year would be consistent with keeping inflation just below its 2 percent target.
But some economists expect the BoE to start to tighten policy in under a year, and see scope for one or two members of the MPC to vote for higher interest rates within a few months.
Officials also said that the fall in mortgage approvals and houses up for sale in recent months was "noteworthy", but that it was too soon to tell if this was going to be temporary, or whether tighter rules on mortgage lending were reducing demand.
The BoE said that it expected most of the impact of tighter mortgage rules to be in the second quarter of 2014, rather than to have occurred in the first three months.
The Monetary Policy Committee also said that its policy of only raising interest rates gradually when the time came could increase the risk of housing market imbalances, but that it was the job of the Financial Policy Committee to mitigate this risk in the first instance.
The FPC holds a quarterly meeting next month, and some economists expect it to tighten mortgage lending rules further, or require banks to carry more capital against the risk of mortgage defaults.
The BoE said that the case for raising rates gradually was reinforced by uncertainty about how the economy would respond.
"It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy," it said.
On the other hand, a premature rate rise could choke off growth, policymakers said.
Although Britain's economy is still slightly smaller than before the financial crisis, the BoE forecasts it will grow by 3.4 percent this year, which would be its fastest rate of growth since 2007.
House prices are also up by almost 10 percent nationally, prompting Carney to name the property market as the biggest domestic threat to financial stability. However, he also said the BoE would first tighten financial regulation to ward off risks, before it raises interest rates.
Inflation was 1.8 percent in April, after a rise in air fares due to a late Easter pushed it up from March's four-year low of 1.6 percent.
The BoE said the strength of sterling, which is at the top of its post-crisis range, was likely to push down on inflation over the next three years, though some firms might use it to increase their profit margins.
(Reporting by David Milliken and Belinda Goldsmith)