Inflation vs growth conflict knocks sterling

LONDON (Reuters) - Sterling hit a three-month low versus the dollar on Wednesday after the Bank of England's quarterly report showed inflation staying above target for some time to come and economic growth slowing sharply.

The dilemma facing the Bank was illustrated by a jobs report earlier in the session, which showed the number of people claiming unemployment benefit rose for the third month running while average earnings growth posted a surprise jump.

Analysts say the two conflicting forces could limit the scope for future interest rate cuts, potentially further hurting the economy and thus sterling.

"What was a surprise in the last few days, is that inflation is worse than expected. And that, as a feedback, is negative for growth. That's what the Bank of England were highlighting," said Peter Frank, currency strategist at Societe Generale.

Sterling fell as low as $1.9366 after the report, its weakest since February 20.

It trimmed losses later, piggy-backing on a broad dollar sell-off after news of an unexpected fall in U.S. inflation, to trade at $1.9425 by 3:02 p.m..

The euro was at 79.50 pence, up 0.1 percent on the day and over eight percent higher since the start of the year.

Bank Governor Mervyn King said the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".

"In my opinion, this is a repeat of the Governor's invitation to sell pounds back in November," Nick Parsons, head of markets strategy at nabCapital, said in a note to clients.

(Reporting by Toni Vorobyova; editing by Stephen Nisbet)