Sterling drops after BoE minutes show rate rise reluctance

(Adds details, quotes)

By Anirban Nag

LONDON, Oct 22 (Reuters) - Sterling fell on Wednesday after Bank of England minutes showed policymakers were firmly against raising interest rates when they met earlier this month.

While two members voted to raise interest rates, most of the Monetary Policy Committee's nine members saw "few signs" of inflation pressures building, indicating that the debate within the committee for tighter monetary policy was losing some steam.

The minutes also showed that members were concerned that Britain's output gap would be slightly larger than previously estimated and there were downside risks to a durable recovery from the euro zone.

Sterling shed 0.6 percent to trade at $1.6012, down from around $1.6066 beforehand.

The euro recovered from a one-week low struck on Tuesday, rising 0.4 percent to hit a day's high of 79.265 pence .

"The minutes painted a fairly bleak picture, suggesting that weaker growth and low inflation in the euro zone has increased risks to the UK," said Alex Edwards, head of the corporate desk at UKForex.

"Calls for a rate hike early next year are diminishing, and if things continue as they are it might not be long before we see the first hike priced in for early 2016 instead."

Before the minutes were released there was talk than one of the BoE policymakers may have switched and voted to keep rates unchanged at record lows. While that did not happen, analysts said the dovish tone of the minutes left few investors in doubt that rates in Britain will stay low for longer.

Last week poor inflation and wage growth data -- both of which the BoE has said are crucial in deciding when to raise interest rates -- drove investors to push back bets on when rates would rise into the second half of next year.

That repricing of rate expectations saw sterling lose more last week against the euro than it has for eight months, and the uncertain monetary policy outlook has seen the pound shed almost 6 percent against the dollar over the last three months.

"The window of opportunity for a pre-election hike is fading fast and thereafter, how far rates can rise as growth slows and fiscal policy is tightened, must be questionable," Societe Generale said in a note. The bank has a short sterling/long dollar recommendation.

Britain heads for a general election in May and investors are also becoming increasingly wary about political risks, which they say could have a bearing on investment flows and sterling.

The latest polling has showed growing support for anti-EU party UKIP, whose leader said he would demand an immediate referendum on European Union membership as his price for supporting any coalition government after the election in May. (Editing by Ruth Pitchford)