Sterling slips, inflation risks threaten growth

LONDON (Reuters) - Sterling slipped on Thursday, staying trapped near three-month lows hit the previous day against the dollar as the currency was pressured by the prospect that higher UK inflation risks would strangle economic growth.

The Bank of England's quarterly inflation report made bearish reading on Wednesday, highlighting the tangle faced by policymakers trying to balance rising inflationary pressures from sky-high commodity prices and economic damage from the ongoing global credit crunch.

The report hacked away at expectations for UK interest rates to be cut in June from the current 5 percent, and left the pound severely pressured as investors worried about future damage to the economy from the inflation versus slowing growth conflict.

Prime Minister Gordon Brown weighed into the rate debate earlier, saying he hoped that the Bank would be able to cut rates further. This had initially boosted sterling, but ultimately did little to quell investors' concerns about the toxic coupling of high inflation and low growth.

"(Higher prices) leaves the BoE very little room to move on monetary easing, and in that respect, it's possible for economic growth to slow quite sharply going forward," said Lee Hardman, currency economist at BTM UFJ.

"The market has come to the view that higher inflation is contributing to further exacerbating the downside risks in economic growth," he said adding that this problem would keep sterling weak.

By 3:06 p.m., sterling was down 0.15 percent at $1.9433, having hit a three-month low on Wednesday at $1.9363. The euro rose 0.2 percent to 79.62 pence.

Bank Governor Mervyn King said on Wednesday 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".

A poll carried out after the Bank report showed it would hold off from growth-boosting rate cuts until the third quarter as it battles soaring inflation.

(Reporting by Naomi Tajitsu and Veronica Brown; Editing by David Christian-Edwards)