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Bank of England maintains interest rate, leaves May hike in play

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Bank of England maintains interest rate, leaves May hike in play

The Bank of England's monetary policy committee voted 7-2 to maintain the bank rate at 0.50% and said it would undertake a more complete assessment of economic momentum at its meeting in May.

"Given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon," the BoE said.

The committee voted unanimously to maintain the stock of sterling nonfinancial investment-grade corporate bond purchases at £10 billion and the stock of U.K. government bond purchases at £435 billion.

Ian McCafferty and Michael Saunders were the only two members who voted against keeping the bank rate unchanged. They said the rise in pay growth could present upside risks to inflation in the medium term.

"Two dissents in favour of a hike reinforced the signal that a May hike is on track, as markets have been expecting," said James Rossiter, senior global strategist at TD Securities.

Annual inflation fell to 2.7% in February from 3.0% in January, well above the BoE's 2% target. The central bank said inflation should decline further in the short term but is expected to remain above the 2% target.

The BoE said it is increasingly confident that pay growth and unit labor costs will rise further due to the tightening labor market. Average weekly earnings rose by 2.8% in three months to January from a year earlier and unemployment declined to 4.3%.

The committee said data released after the February inflation report were "broadly consistent" with its views and have "few implications for the medium-term outlook."

"The May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures," according to minutes of the monetary policy committee meeting.

Market participants are expecting the central bank to raise interest rates in May due to a pickup in wage growth and progress in Brexit negotiations.

The BoE has left the possibility of a May hike on the table, but expectations for an increase have decreased slightly after today's statement as markets were hoping for stronger signals, said James Smith, developed markets economist at ING Research.

The U.S. Federal Reserve raised its benchmark interest rate by 25 basis points on March 21 and signaled that it is still penciling in three rate hikes in 2018.