Murky outlook keeps Bank rate-setters divided

The Bank of England is seen behind a flower bed in the City of London April 11, 2011.

LONDON (Reuters) - The Bank of England is no closer to raising interest rates, minutes of its latest rate-setting meeting showed on Wednesday, as mixed jobs data highlighted the patchy nature of Britain's economic recovery.

The central bank has kept interest rates at a record low 0.5 percent for more than two years, and despite inflation rising to more than double its target the hawks on the monetary policy committee are not gaining ground.

May's 6-3 voting split was unchanged from the previous three months, and two of the three Monetary Policy Committee (MPC) members who voted to raise rates -- Martin Weale and Spencer Dale -- felt the case remained "finely balanced."

In another sign of the cloudy economic outlook, separate figures on Wednesday showed the number of people claiming jobless benefit unexpectedly rose by 12,400 last month, the biggest rise in over a year.

However, the overall number of people without work fell by 36,000 in the three months to March, taking the unemployment rate down a notch to 7.7 percent.

"In the highly uncertain environment, it seems the best that MPC members can do is remain in wait-and-see mode," said Hetal Mehta at Daiwa Capital Markets.

The biggest proponent of higher rates, Andrew Sentance, leaves the MPC at the end of this month and will be replaced by former Goldman Sachs economist Ben Broadbent who on Tuesday struck a distinctly less hawkish tone.

With the bulk of the government's austerity measures yet to take effect, most investors do not believe the Bank will raise rates before the end of the year.

ECONOMIC WEAKNESS

The economy grew by 0.5 percent in the first three months of the year, barely making up for output lost at the end of 2010 and lagging well behind its major European trading partners.

The minutes noted that business and consumer confidence surveys had given mixed signals "the interpretation of which was further complicated by the impact of the snow in December and erratic movements in construction output."

Wild swings in construction numbers have complicated the job for economists, raising question marks over the real strength of the economy. The late timing of Easter and a one-off public holiday for the Royal Wedding have created further distortions to recent data.

Most Bank policymakers did not yet see sufficient justification to raise rates and stressed the uncertain economic outlook and the risk of persistent sub-par growth.

Those wanting to raise rates said the economic fog was unlikely to clear for months to come, and there was too much risk in waiting longer before raising rates.

Sentance continued to vote for a 50 basis point rise, but the majority on the committee still argued that there was little sign that inflationary pressures were becoming entrenched.

Wednesday's labour market data validated that view. Average weekly earnings growth nudged up to 2.3 percent in the three months to March from 2.1 percent in the three months to February but remains well below inflation.

Consumer price inflation jumped to 4.5 percent in April and the Bank forecasts published last week showed it was likely to peak at 5 percent later this year. Retail price inflation, widely considered a better gauge of the cost of living, is running at 5.2 percent.

"Earnings growth remains deeply negative in real terms, and will continue to act as a major constraint on household spending," said Jonathan Loynes of Capital Economics.

(Additional reporting by Sven Egenter and Fiona Shaikh, Editing by Hugh Lawson)