* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Jemima Kelly
LONDON, Feb 9 (Reuters) - Sterling climbed against the dollar and euro on Friday, extending the previous day’s gains, after the Bank of England said interest rates would probably need to rise sooner and by more than it had previously thought.
BoE Deputy Governor Ben Broadbent said on Friday he did not think a couple of interest rate hikes in the space of a year should come as a great shock, though he also added that the central bank had not fixed any path for tightening policy.
That came a day after the central bank said it was likely to tighten policy sooner and by more than policymakers had reckoned only three months ago, because Britain’s slow-moving economy was getting a boost from the global recovery.
Although the pound jumped on the BoE’s more hawkish tone, the currency’s gains were muted, with the main focus of markets a sharp stock market selloff that has driven demand for the dollar.
Since Monday, sterling was still down more than 1 percent against the dollar, leaving it on track for its worst weekly performance in four months.
“Arguably, the pound could have strengthened even further (on the BoE) if it were not for less favourable external conditions,” said MUFG currency strategist Lee Hardman.
“The correction lower in global equities appears to be encouraging some de-risking and lightening of positions in the foreign exchange market, which is acting as a temporary dampener on the pound in the near term.”
Data released on Friday showing British industrial output sank by more than expected in December had little impact on the pound.
It traded up 0.3 percent on the day at $1.3953. Against the euro sterling was up 0.1 percent at 87.94 pence.
After Thursday’s policy meeting, financial markets now price in a nearly 70 percent chance of a BoE rate hike in May.
But the BoE’s rate-setters on Thursday gave themselves time to assess how Britain is coping with the approach of its exit from the European Union.
“The Bank of England’s Brexit-contingent hawkish signal today means meaningful sterling upside may be slightly tempered in the near-term,” wrote ING currency strategist Viraj Patel in a note to clients.
“We expect full upside potential to be unleashed once we get greater clarity on a Brexit transition deal.”
Not all market players agree, however. A Reuters poll of strategists found on Thursday that this year’s sterling surge is over, and concerns over Brexit will start weighing the currency down again. (Editing by Matthew Mpoke Bigg)