Last checked at 
* Some on MPC think rate rise decision now "more balanced"
* Easter helps retail sales to fastest growth since 2004
* MPC says low rates could distort housing market
* Pound at 5 1/2-yr high, gilt/Bund spread widest since 1998
* Reuters poll shows economists still see Q2 rate rise (Adds Reuters interest rate poll)
By David Milliken and Ana Nicolaci da Costa
LONDON, May 21 (Reuters) - The Bank of England appears to bea step nearer to raising interest rates, with some of its topofficials starting to say the case for keeping rates on hold isnow more finely balanced.
BoE Governor Mark Carney, who so far has had the backing ofall of the Bank's eight other monetary policymakers in keepinginterest rates at a record low, said last week that the Bank wasonly edging towards an increase in borrowing costs.
Forecasts he presented suggested no hike for around a year,and most economists in a Reuters poll published on Wednesdayshared that view.
But more than a third said rates could rise in the firstthree months of next year or earlier, and some expect one or twoof the nine members of the BoE's Monetary Policy Committee tovote for a rate rise within just a few months.
The prospect of a split on the MPC was backed up by minutesof the its May policy meeting.
"For some members, the monetary policy decision was becomingmore balanced," the minutes said. "It could be argued that themore gradual the intended rise in Bank Rate, the earlier itmight be necessary to start tightening policy."
Sterling hit a five-and-a-half year high on a trade-weightedbasis after the minutes and and a report that showed a surge inBritish retail sales in April.
The gap between British and German 10-year interest ratesrose to its highest in over 15 years as investors added to betsthat the BoE would raise rates well before the euro zone.
"The debate is clearly shifting in favour of moving rates inthe not too distant future," said George Buckley, a UK economistat Deutsche Bank.
The BoE has kept interest rates at a record low 0.5 percentsince March 2009, and the entire MPC want to see the economyrunning at closer to full capacity before they go up.
When rates do start to rise, Carney has stressed thatincreases will be gradual, and to a level much lower than beforethe crisis, when BoE rates were around 5 percent.
But Britain's economy has picked up much more quickly thanexpected over the past year. The BoE now forecasts growth of 3.4percent for 2014, which would be the highest rate since 2007.
Figures on Wednesday showed retail sales jumped 6.9 percent,their biggest rise since May 2004, aided by a late Easter.
"The figures will support the feel-good feeling about theeconomy, but there is little sign of inflationary consumeroverheating that could concern the BoE here," said Lena Komilevaat G+ Economics, a consultancy.
RATE TIMING STILL UNCERTAIN
It remains far from certain that a majority of the MPC wouldback an early rate rise, especially as three of its nine membersare due to replaced over the next three months.
The minutes showed continued disagreement about how muchslack is left in Britain's economy and how rapidly growth willuse it up. Policymakers also noted a premature rate rise couldchoke off growth, and said there was little sign inflation wouldexceed its 2 percent target in the foreseeable future.
Rather than raise rates, the BoE may take steps through itsFinancial Policy Committee to curb the effects of low rates onBritain's housing market. The MPC noted that its commitment tokeep rates low could distort the market and said the FPC mighttake steps to mitigate that when it meets next month.
House prices have risen by around 10 percent over the pastyear, and both Carney and Prime Minister David Cameron havecalled housing the biggest domestic risk to financial stability,possibly paving the way for moves to cool demand.
On Tuesday, Lloyds Banking Group said it would stoplending at multiples above four times a borrower's income formortgages of over 500,000 pounds ($842,400) to reduce itsexposure to London, where prices are rising fastest.
Tighter mortgage rules came into force in April and mortgageapprovals and the number of homes up for sale have fallen inrecent months. The MPC said it was too soon to know if the ruleswere having an impact.
Wednesday's Reuters poll showed that 27 out of 30 economistsbelieved that the BoE is right to use the FPC's tools ratherthan higher interest rates to curb housing market excesses. ($1 = 0.5935 British Pounds) (Additional reporting by Belinda Goldsmith; editing by WilliamSchomberg and Jeremy Gaunt)
