Pound near lows after Bank minutes

LONDON (Reuters) - The pound fell against the dollar on Wednesday after minutes from the Bank of England's August meeting showed a nervous Monetary Policy Committee split three ways on the direction of interest rates.

A run of poor data from the housing, retail and service sectors and the Bank's assertion that inflation will fall below target in two years, has raised expectations that interest rates may be cut from 5.0 percent before the year is out.

The minutes showed one policy member voted to hike interest rates and another to cut, but the other seven decided to keep borrowing costs steady at 5 percent for a second month in a row.

After the relatively gloomy economic outlook painted in the Bank's quarterly inflation report last week, markets had leaned toward a more dovish split.

So sterling briefly trimmed its losses after the minutes came out before economic reality snapped into focus.

"The minutes of August's MPC meeting might be seen as a touch more hawkish than expected after last week's Inflation Report," Jonathan Loynes, chief european economist, at Capital Economics.

"Nonetheless, with inflation close to a peak and the economy heading towards recession, we still think rates could be falling by year-end and will eventually drop much further than the markets expect."

A cut in borrowing costs would erode sterling's yield advantage over the U.S. dollar with the Fed's 2 percent rate increasingly looking too easy.

By 3:01 p.m., the pound was at $1.8624, down 0.2 percent on the day, and not far off last week's 2-year lows at $1.8510. The euro was flat at 79.17 pence.