By James Amott
London, July 17 (Bloomberg) -- The British pound trimmed losses to trade little changed against the dollar after a U.K. inflation report fueled speculation the Bank of England will leave interest rates on hold, or even raise them, by year-end.
Sterling was at $1.3995, compared with $1.4002 late yesterday. Earlier it slipped to $1.3932, the lowest since June 20, after Royal Bank of Scotland Group Plc agreed to buy part of Mellon Financial Corp.'s consumer-banking unit for $2.1 billion. The pound was little changed at 60.85 pence per euro, compared with 61.06. It has fallen 6.2 percent against the dollar and risen 3.8 percent against the euro this year.
Consumer prices rose more than expected for the second straight month, hovering just below the government's target level of 2.5 percent. That gives the BOE's Monetary Policy Committee less scope to ease borrowing costs, buoying the pound as higher interest rates tend to make short-term deposits more alluring to investors.
``The market is saying we could get a rate hike after these figures,'' said Kirit Shah, a strategist at Sanwa International. ``That's good news for sterling in the short term.'' He sees the U.K.'s key rate on hold at 5.25 percent for the rest of the year.
Excluding mortgage interest, the cost of goods in shops and supermarkets rose 0.2 percent in June after 0.8 percent in May, the government said. Annual growth remained at 2.4 percent. Economists polled by Bloomberg News expected the annual rate of growth to slow to 2.3 percent.
The rate on the interest-rate futures contract for September was at 5.33 percent, 8 basis points above three-month lending rates, which suggests traders see the Bank of England's key interest rate on hold in the third quarter.
Traders will be focusing on U.K. labor market and retail sales figures for June, due tomorrow and Friday, to gauge the state of Europe's No. 2 economy. Unemployment likely held near a 25-year low, while retail sales probably rose 0.2 percent in June after a 0.8 percent gain in May, according to a Bloomberg News survey.
A recent report showed U.K. industrial production dropped at its quickest pace in four years. Further signs of slowing growth may hurt the pound as investors look elsewhere for better returns.