* BoE rate hike warning lifts sterling, gilt yields, hits stocks
* Dollar heads higher after above-forecast inflation data
* Oil rises on expectations of stronger demand
* Gold hits two-week low as dollar holds firm
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh (.)
By Nigel Stephenson
LONDON, Sept 14 (Reuters) - Sterling jumped after the Bank of England warned it could raise interest rates for the first time in a decade in the coming months while the dollar rose after above-forecast inflation data that could allow the Federal Reserve to hike for a third time this year.
Wall Street was set to open lower, index futures showed after the inflation data . Earlier, weak Chinese data had weighed on European and Asian shares and pulled an MSCI measure of world stock prices down from record highs hit on Wednesday.
Britain’s blue-chip FTSE 100 share index fell sharply after the BoE warning, which followed a monetary policy meeting, and was last down 0.7 percent at a two-week low.
Policymakers kept rates unchanged at a record low 0.25 percent but warned a hike was likely to be needed in coming months if the economy keeps growing and inflationary pressures continue to build.
Britain’s vote last year to leave the European Union has raised doubts about the long-term health of the economy and strong short-term inflationary pressures.
Sterling rose to as high as $1.3358, adding a cent and a half to touch its strongest in more than a year, and to 89.11 pence per euro after the decision.
Britain’s 10-year gilt yield rose to its highest since early August at 1.21 percent, up 7 basis points on the day. The rate-sensitive two-year yield was on course for its biggest weekly rise in over two years.
“After recent warnings that markets were under-priced for potential interest rate hikes, the MPC appears close to following through and tightening its policy in response to above-target inflation,” said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.
The dollar reversed earlier falls and rose against a basket of major currencies after data showed consumer price inflation edged up to 0.4 percent last month, beating forecasts for 0.3 percent.
The dollar was 0.4 percent stronger at 110.90 yen while the euro fell 0.3 percent to flat at $1.1847.
The dollar hit a 10-month low of 107.32 yen last week on worries over Hurricane Irma and North Korea but has rallied since as U.S. Treasury yields rose and investor appetite for risk grew.
The Swiss franc fell against the dollar and the euro after Switzerland’s central bank softened its language on the franc’s value, dropping its mantra that it was “significantly overvalued” and saying instead that it was “highly valued”.
Shares fell in Asia, knocking MSCI’s All-Country World index , which tracks shares in 46 countries, off a record high hit on Wednesday.
The pan-European STOXX 600 index opened lower but was last flat on the day.
MSCI’s broadest index of Asia-Pacific shares outside Japan edged down 0.1 percent. China stocks fell 0.3 percent and Tokyo’s Nikkei index closed down 0.3 percent as the China numbers weighed on sentiment.
In fixed income markets, U.S. 10-year Treasury yields rose 1.4 basis points to 2.21 percent.
Their German equivalents, the benchmark for borrowing costs in the euro zone, hit a 3-1/2-week high of 0.42 percent .
A weaker euro, which is down 1.7 percent from 2-1/2-year highs hit against the dollar last week, could encourage the European Central Bank to bring forward plans to withdraw monetary stimulus that has crushed euro zone bond yields.
“The weaker euro has amplified the headwinds facing the bond market,” said Rainer Guntermann, a strategist at Commerzbank. “With the euro off its highs, it is easier for the ECB to taper next year.”
Among commodities, copper fell 1 percent to $6,487 a tonne on concerns about excess supply.
Oil prices rose, building on gains racked up on Wednesday when the International Energy Agency forecast stronger global demand. Brent crude, the international benchmark, was up 40 cents at $55.57 a barrel.
Gold hit its lowest in almost two weeks as the dollar held firm. The metal fell to as low as $1,315.71 an ounce before rebounding to $1,323.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Additional reporting by Shinichi Saoshiro in Tokyo, Jemima Kelly, Saikat Chatterjee and Dhara Ranasinghe in London; Editing by Matthew Mpoke Bigg