Bank of England paves way for first rate hike in a decade

* BoE (Shenzhen: 000725.SZ - news) signals rate hike in "coming months"

* MPC votes 7-2 to keep Bank Rate on hold for now

* Policymakers say less tolerant of rising inflation

* MPC cautions that Brexit effects uncertain

* Sterling jumps by 1 cent against dollar

(Adds Carney comment)

By David Milliken and William Schomberg

LONDON, Sept 14 (Reuters) - The Bank of England said it was

likely to raise interest rates in the coming months if the

economy and price pressures keep growing, giving its clearest

signal to date that Britain's first rate hike in a decade is

approaching.

The BoE said its tolerance for above-target inflation was

lessening even if Britain's departure from the European Union

remained a risk. Data this week showed prices rising faster and

unemployment falling to a four-decade low.

Policymakers voted 7-2 on Thursday to keep rates on hold at

a record-low 0.25 percent, as expected.

But the new guidance from the BoE pushed sterling to a

one-year high against the U.S. dollar. Investors priced in a

more than 50 percent chance of a rate hike before the year's

end.

The BoE said the economy now looked closer to running at

full capacity as employment rose and wages picked up, boosting

inflation pressures.

If this continued, most of its policymakers felt "some

withdrawal of monetary stimulus was likely to be appropriate

over the coming months," it said.

Governor Mark Carney said he was among the BoE rate-setters

who felt the balance of risks for the economy was shifting away

from a Brexit slowdown and towards rising inflation, meaning the

chance of a rate hike had "definitely increased".

"I would describe (a rate hike in) November as being live,"

Nomura economist George Buckley said.

Other economists said they still thought the BoE was in no

hurry, given the slowdown in Britain's economy this year and the

doubts about what leaving the EU in 2019 will mean.

"We see this as an attempt to shake markets out of their

complacency after the failure of previous, subtler, attempts,"

Andrew Goodwin, an economist at Oxford Economics, said.

BREXIT DILEMMA

The Brexit vote has put the BoE in a dilemma. On the one

hand, it wants to support the economy through its EU divorce,

leaving it behind other central banks raising interest rates

such as the U.S. Federal Reserve.

But at the same time, it needs to keep a grip on inflation

which rose sharply after the Brexit vote weakened the pound.

The BoE has previously suggested a rate hike was nearing

only to be caught out by surprises in the economy, earning

Carney the epithet of "unreliable boyfriend" from a politician.

Indeed, the BoE said on Thursday there were "considerable

risks" to the outlook, including Brexit.

Next (Frankfurt: 779551 - news) week Prime Minister Theresa May is due to give a speech

on Brexit and her Conservative Party holds a conference in

October. May will also attend an EU summit next month.

Economists at Citi said there still hurdles in the way of a

rate hike. "If these events pass without significant effect on

economic confidence, if inflation exceeds 3 percent in October

and if the labour market continues to tighten, a 25 basis-point

Bank Rate hike could become a reality for November," they said.

Most economists had been expecting a first rate hike by the

BoE only in 2019, according to a Reuters poll last month.

BETTER THAN EXPECTED?

The BoE said on Thursday that the economy had done a bit

better than expected since its policymakers met in August, but

it was unclear how sustained any increase in growth might be.

Inflation was likely to rise further above its 2 percent

target and exceed 3 percent in October, slightly more than

previous forecasts, after reaching 2.9 percent last month.

Most economists judge that wage growth is still weak at 2.1

percent year-on-year in July. But the BoE surprised many of

them, saying pay was rising at an annualised rate of 3 percent

when measured over a shorter period. Furthermore, statistical

effects might be making pay look too low, it added.

The BoE also said there were signs consumer demand might now

be picking up after inflation hurt spending earlier this year.

And it repeated its warning that Britain could no longer

grow as fast as it had in the past without causing excessive

inflation.

Two policymakers, Ian McCafferty and Michael Saunders, voted

once again to raise rates to 0.5 percent to reverse the

emergency cut made in August 2016 shortly after the Brexit vote.

Some analysts had expected BoE Chief Economist Andy Haldane

to join the dissenters.

Gertjan Vlieghe, who was the first MPC member to vote for a

rate cut after the Brexit vote, is due to speak on Friday while

Carney will make a speech on Monday.

(Editing by Toby Chopra and Jon Boyle)