Sterling inches up after BoE minutes, but gains capped

LONDON, July 23 (Reuters) - Sterling rose on Wednesday, hitting a three-week high versus the euro after Bank of England minutes showed that a policymaker had favoured an interest rate rise, underlining fading expectations of a cut this year.

Minutes of the July 9-10 policy meeting, when the BoE held rates at 5 percent, showed arch hawk Timothy Besley wanting an immediate, quarter-point hike and dove David Blanchflower continuing his campaign for a cut to resuscitate the ailing economy [ID:nL23464574].

Sterling <GBP=> rose to a session high of $1.9963 after the minutes were released, to trade more than 0.2 percent higher on the day.

The euro <EURGBP=> slipped to a three-week low of 78.85 pence by 1020 GMT, also pressured by talk of bid interest from Spanish bank BBVA (BBVA.MC: Quote, Profile, Research) for its UK rival HBOS (HBOS.L: Quote, Profile, Research).

But sterling's gains were limited, with analysts saying that many in the market had already anticipated the possibility that some board members would call for higher rates.

"The three-way split was interesting, but the market was expecting a hawkish outcome given that we did see a very strong inflation surprise earlier this month, which was known at the MPC meeting," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

Figures earlier this month showed that June UK consumer prices rose to their highest in at least 11 years, while the retail price index hit a 15-month high, indicating that inflation continues to rise as energy and food prices surge.

While Blanchflower was widely expected to call for a rate cut, the three-way split illustrated the central bank's dilemma in trying to balance a slowing economy, which often warrants rate cuts, with the prospect of tighter monetary policy to contain inflation risks.

"The outlook is very uncertain and the minutes reflect that," said Russell Jones, head of global research for fixed income and currencies at RBC Capital Markets.