Analysis - In countdown to UK election, rate hike moves to centre stage

By David Milliken

LONDON (Reuters) - Britain's politicians and central bankers are watching one another even more closely than usual as the timing of a national election and a headline-making interest rate rise look set to converge.

With parliament and the Bank of England returning to work after the summer, the approach of the vote on May 7, 2015 is likely to be a key factor in the BoE's thinking on when to raise interest rates for the first time since the financial crisis.

With politicians fiercely at odds over whether the current government should be credited with economic recovery or blamed for a painful decline in living standards, the first interest rate hike since 2007 will be fodder in a close election race.

Two BoE policymakers voted last month to raise rates, and fast growth and tumbling unemployment means more may agree to act to cool the economy in the coming months.

In theory, the date of the election should make no difference to the central bank: The BoE has enjoyed decision-making independence since 1998 and Governor Mark Carney said earlier this year that the political cycle would have no effect on the BoE's decision to raise rates.

But history shows that interest rates almost never rise in the run-up to a British national election. The last time rates went up less than six months before an election was in 1955.

"The timing of the general election complicates the monetary policy-making process," said Philip Shaw, an economist at Investec. "You risk becoming a political football."

SOONER RATHER THAN LATER?

The Bank usually moves on policy in the months when it makes new economic forecasts - February, May, August and November.

One way to avoid a first rate hike just as the election campaign hits fever pitch would be for the BoE to move sooner rather than later, Shaw said.

The Bank could raise rates as soon as November and again in February before announcing a pause until the political picture was clearer.

But a first move in November this year would depend heavily on signs that wages are about to grow more strongly - something that has failed to happen so far. Economists also see November as too soon - a recent Reuters poll gave a consensus forecast for a first rate hike in February.

The Bank has pushed back by four days its May decision, which would normally have been on the same day as the election.

But even if it was willing to wait this long - and likely fuel rate hike speculation in the final weeks of the election campaign - May could still be poor timing as a new government could be setting out its policies, or entering coalition talks.

Simon Wells, chief UK economist at HSBC, said the election could make it difficult for the BoE to raise rates in May but might not be bad news for the government if it came earlier.

"The economy is now growing so fast ... that the government can sell this as further normalisation of the economy and welcome relief for savers," he said.

RATE RISE OK WITH TORY VOTERS

A November rate move would test the conventional wisdom that higher interest rates hurt incumbent governments: Opinion polls currently suggest that higher rates might not cost votes for the Conservatives, who are a few percentage points behind the opposition Labour party in the polls.

A survey last month by polling firm YouGov showed that 33 percent of potential voters said they would be better off if rates rose, while only 23 percent wanted a rate cut.

Older people - who are more reliant on savings, more likely to vote and tend to support the Conservatives - typically wanted higher interest rates. Younger voters with mortgages did not.

In the end, the impact of a rate hike during election campaigning will depend largely on whether the government can cast it as proof of economic recovery - rather than it strengthening Labour's claims of a cost-of-living crisis.

Anthony Wells, a YouGov associate director, said the government would probably prefer rates to stay on hold to avoid an extra element of uncertainty in what promises to be a tough election campaign.

But if the BoE does raise rates the Conservatives can at least take some comfort from the past. The last time rates rose in the run-up to a national election in 1955, their party remained in power - with an increased majority.

(Editing by William Schomberg and Sophie Walker)