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Bank of England minutes push sterling higher

By Jemima Kelly and Anirban Nag

LONDON, May 20 (Reuters) - Sterling rallied against the dollar and euro on Wednesday after minutes from the latest Bank of England meeting showed that two policymakers who voted to keep interest rates on hold made finely balanced decisions.

Minutes of the Monetary Policy Committee's May meeting showed all nine members voted to keep rates at a record low of 0.5 percent. But they were split on the risk that falling unemployment would trigger faster wage growth, which could stoke a bigger pick-up in inflation than expected.

After the minutes, sterling reversed losses against a broadly stronger dollar to trade at $1.5572, up 0.4 percent and well above the $1.5505 before their release. The dollar was firmer against other major currencies ahead of minutes from the latest Federal Reserve meeting.

Against the euro, sterling rose around 0.8 percent to trade at 71.30 pence per euro.

"These are slightly more hawkish minutes than perhaps expected," said Simon Derrick, head of currency research at Bank of New York Mellon in London.

Three days of gains for the dollar, which until this week had been on its worst run in four years, have helped curb a rally in sterling that followed the centre-right Conservative party's unexpectedly emphatic election victory this month.

Sterling was knocked down on Tuesday by figures showing that, on an annual basis, UK inflation fell into negative territory in April for the first time since 1960.

The BoE, though, described the drop in inflation to negative territory as temporary.

"With inflation expected to turn a corner within the next few months, we believe a change in voting will be in evidence within the next two meetings," said Richard de Meo, managing director of Foenix Partners, a firm which offers currency hedging solutions to UK companies.

"Just three more votes will then be needed for confirmation of what would be a momentous, crisis-exiting rate hike, with the chances of a 2015 policy change currently looking underpriced."

Retail sales data is due on Thursday and another set of robust numbers should cement a view that the UK economy is outperforming its peers. (Editing by Susan Fenton)