June 23, 2017 / 8:42 AM / 3 months ago

Sterling jumps as market prices in BoE shift

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Patrick Graham

LONDON, June 23 (Reuters) - Sterling gained by almost half a percent against the dollar on Friday, helped by a shift in expectations for interest rates that has some in the market backing the Bank of England to raise borrowing costs within months.

Analysts from Japanese bank Nomura on Thursday flipped to calling for a rise in rates within six months, after the defection over the past week of three members of the BoE’s policy committee to the camp backing higher rates.

Policy hawk, Kristin Forbes, in her last speech before leaving the bank, urged colleagues on Thursday evening to raise rates immediately to quell the inflation pressure stemming from a weaker pound.

“It is not our view - we think rates will be on hold for the next year - but the market has definitely started pricing in the chance of a hike in the next six months,” said Rabobank strategist Piotr Matys. “That is clearly giving sterling some support.”

Short-term UK market interest rates have shifted since a speech by the Bank’s chief economist, Andy Haldane, earlier this week, with short sterling pricing in a strong chance of a rise in rates by December.

That puts aside the doubts of many that the UK economy - and household demand - are currently ill-equipped to swallow higher interest rates.

“We’re not here to tell the BOE what they should do, we’re here to figure out what they are most likely to do,” Nomura’s Jordan Rochester said in a note to clients.

“Whilst it may not be in line with Governor Carney’s Mansion House speech, we ... now expect the MPC to raise rates for the first time in a decade at its next meeting in August.”

Sterling traded 0.4 percent higher at $1.2733 and 0.2 percent stronger against the euro at 87.78 pence. (Editing by Larry King)

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