By William James and David Milliken
LONDON (Reuters) - Finance minister Philip Hammond pushed back against the prospect of a "hard Brexit" on Wednesday, accusing cabinet rivals of undermining Britain's EU exit negotiations and stressing that migration controls must not harm the economy.
Hammond also sought to ease concern among investors that the government may want to influence monetary policy after a spat between Bank of England Governor Mark Carney and Prime Minister Theresa May who has criticized the BoE's low interest rates.
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The June 23 Brexit decision has posed a tough challenge for British policymakers who say they must heed the call from voters to tighten border controls, something which could reduce access to the EU's single market and hurt the economy.
Newspapers have reported a split in Prime Minister Theresa May's cabinet, with Hammond at odds with ministers pushing to prioritize controls on migration over economic concerns.
Hammond said May needed a range of options to strengthen her negotiating hand with the EU and he would make sure she knew the cost of all those alternatives.
"Those that are undermining the effort are those that are seeking to close down that negotiating space, seeking to arrive at hard decisions that we don't need to make at this stage," he told a parliamentary committee.
"I think that it would be far more helpful to this debate if we were able to conduct these internal discussions privately without leaks to newspapers."
Britain is due to enter a two-year negotiating period to decide the terms of its exit from the bloc by the end of March.
Nearly four months after the vote, sterling <GBP=D4> is 17 percent below its pre-referendum levels against the dollar.
Its latest falls were triggered by concerns that May favored a hard Brexit. But the pound rose as Hammond spoke and market analysts said it was significant that he had struck a "softer" tone than May.
"It gives the markets a glimmer of hope that the UK may not target a 'hard' Brexit," Kathleen Brooks, a Research Director at City Index, said.
Hammond said any steps to reduce net migration would protect "the vital interests of our economy", citing the financial sector as a high priority. He said he did not expect highly skilled workers to be targeted in any clampdown.
"I cannot conceive of any circumstances in which we would be using those controls to prevent banks, companies moving highly, qualified highly skilled people between different parts of their businesses," he said. "That's essential for the smooth operation of our economy."
Earlier this week, the prime minister's spokeswoman said May has full confidence in Hammond - who campaigned to keep Britain in the EU - and wants to hear different views on how to make a success of leaving the EU.
Treasury sources have denied reports that Hammond was seeking to obstruct the exit process and that he was on the brink of resigning his post.
Asked about those reports, Hammond said it was no secret there were different views on how to approach the Brexit talks.
The EU vote triggered the deepest political and financial turmoil in Britain since World War Two and the biggest ever one-day fall in sterling against the dollar.
There have also been signs of friction between the government and the Bank of England since the referendum.
Bank of England Governor Carney on Friday hit back at criticism from May that low interest rates hurt the poorest households, saying he would not "take instruction" from politicians on how to do his job.
Asked about May's comments, Hammond said nothing had changed: "Monetary policy is independently determined. That will continue to be the case."
"My understanding is that what the prime minister was trying to say is that we recognize that monetary policy, which is an important tool of macroeconomic policy, has a distributional impact," he said.
"To the extent that the government believes that distributional impact needs to be addressed or corrected we also have tools available to do that."
(Additional reporting by Helen Reid; writing by William James; editing by William Schomberg and Richard Balmforth)