LONDON, Feb 11 - Sterling pressed up towards this week's 11-year high against the dollar on Wednesday and held near a 10-month peak on the euro after the Bank of England supported market expectations of higher interest rates this year. Releasing its quarterly inflation report, the Bank said it expected inflation to pick up sharply this year, hit its 2.0 percent target in two years and keep rising after that. UK consumer price inflation is running at 1.3 percent. But the Bank, concerned about strength in consumer debt and house prices, has raised rates by a total of half a percentage point to 4.0 percent since early November and the pound has gained on other major currencies in expectation of more to come. "It certainly suggests interest rates are going up in line with what the market already expects, though it was moderately tempered by the comments on sterling's trade-weighted appreciation," said Jane Foley, currency strategist at Barclays Capital in London.
On a trade weighted basis, sterling hit a one-year high of 104.6 <=GBP> on Wednesday and went to $1.8710, close to Tuesday's 11-year peak of $1.8734. Against the euro, the pound was at the session's 10-month high of 67.73 pence , around 0.1 percent up on the day. The Bank said in its report that the large U.S. current account deficit could provoke further falls in the U.S. dollar. A consequent rise in the euro could derail the euro zone recovery and pull back projected growth forecasts for the world economy. Sterling's trade weighted rise since the November forecast round would also dampen export growth in the second year of the forecast, it said. Adam Cole, currency strategist at Credit Agricole Indosuez, said the report was slightly hawkish, with growth forecast above trend. "The bias has to be towards another hike. It's mildly supportive for sterling, backing the carry story that's been driving market for last few days," he said.
The Bank said gross domestic product was expected to rise by over 3.0 percent for most of the next two years before slowing slightly as the recent strength of the pound affected exports. Earlier, data showed British unemployment fell to a 2-1/2 year low in the final quarter of 2003 while growth in earnings unexpectedly slowed. Joblessness fell by 21,000 people on the quarter to 1.46 million. The claimant count of people drawing unemployment benefit fell by 13,400 in January to 892,100, the lowest level since September 1975 and, under that measure, giving a jobless rate of 2.9 percent, down from 3.0 percent previously. Analysts said the data suggested a healthy labour market which was not giving rise to inflation pressures but which would allow the central bank to raise rates to a more neutral level in months to come from what is viewed as a relatively growth-boosting level at the moment.//