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The Bank of England set the stage for a second interest rate rise at its next meeting in May, saying that pay growth was picking up and inflation was likely to remain above its 2 per cent target for too long.

Two members of the nine-strong Monetary Policy Committee wanted an immediate rise in interest rates on Thursday to 0.75 per cent from the current 0.5 per cent rate while the others agreed that an “ongoing tightening of monetary policy over the forecast period would be appropriate”.

The MPC maintained its pledge that any rate rises to come “were likely to be at a gradual pace and to a limited extent”, a commitment that has persuaded financial markets not to expect more than two rate rises this year.

Financial markets, which generate prices based future official interest rates, already expect a rate rise in May is more likely than not and the minutes of the March meeting make no attempt to correct that view.

With Michael Saunders and Ian McCafferty breaking ranks and voting for an immediate increase in interest rates, the MPC replayed the events of last Autumn when these two members’s views seeking rate rises in September foreshadowed the tightening in policy announced in November.

The minutes of the meeting said the two dissenters were concerned that there was little capacity for the economy to grow faster without inflation rising and pay growth was already picking up. “A modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation that might ultimately necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment,” they wrote in the March MPC minutes.

The seven in the majority on the MPC argued that nothing had changed significantly since the February meeting to justify an immediate move, but they still believed rates would have to rise faster than markets expected at the time.




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