Bank of England upbeat on euro zone, eyes inflation pressures - minutes

(Adds market and analyst reaction, detail from minutes)

By David Milliken and Li-mei Hoang

LONDON, April 22 (Reuters) - Bank of England policymakers struck a more bullish tone on the euro zone and the prospects for higher inflation in their latest set of policy minutes on Wednesday, pushing sterling higher, though a rate rise still appears some way off.

Two policymakers said their decision to keep rates at 0.5 percent was again "finely balanced" -- suggesting they may soon vote for a rate rise -- and others cited factors that may cause record-low inflation to pick up faster than expected next year.

The nine members of the Monetary Policy Committee were unanimous in voting to keep rates steady.

Sterling rose above $1.50, approaching its highest level in more than a month, though the reaction in bond and interest rates futures markets was more muted, with economists saying they still expected rates to stay on hold for the rest of 2015.

"The only way is up for interest rates, but not yet. The tone from the MPC (KOSDAQ: 050540.KQ - news) seems to be taking baby steps in the hawkish direction," said Alan Clarke, head of European fixed income strategy at Scotiabank.

Policymakers said at their April 8-9 meeting that they still expected consumer price inflation to dip below zero in the coming months, and for it to remain too far below the central bank's 2 percent target for the rest of the year.

But for some at least, the outlook for growth and inflation appeared a little better than it did last month, as the European Central Bank's asset purchase programme and other factors lifted prospects in the euro zone, Britain's biggest trading partner.

"Although it was too early to be confident, a succession of firmer data suggested that growth in the euro area economy was picking up," the BoE (Shenzhen: 000725.SZ - news) said.

Weak demand in the euro zone has weighed on British exports for years, and the BoE said stronger growth there would outweigh "any influence the ECB's asset purchase programme was having on the configuration of exchange rates".

The BoE said that for some policymakers, the improved euro zone outlook was the month's biggest development. For others this was cancelled out by unexpected weakness in the United (Shenzhen: 000925.SZ - news) States -- though there was a good chance that would be fleeting.

Policymakers also appeared slightly more focused on upside risks to British inflation than in previous months, despite the risk that some downward pressures on prices could persist.

Strong economic growth was unlikely to be able to continue without pushing up prices and wages, which needed to grow faster to help the BoE hit its 2 percent inflation target.

The central bank also said the sharp fall in inflation in recent months could have been partly caused by sterling strength affecting prices sooner than expected, and that inflation could then bounce back more strongly when temporary downward pressures on prices faded.

Some economists also cited a remark that markets only priced in a first rate rise for September 2016 -- and that expected tightening thereafter was "exceptionally slow" -- as a signal that markets had underpriced the risk of higher rates.

"The description of market expectations ... could be taken a signal that the market has put too much weight on low inflation and exchange rate and not enough on other factors that drive the policy decision," said BNP Paribas (Xetra: 887771 - news) economist Dominic Bryant. (Editing by Toby Chopra)