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Sterling slips as high inflation not seen changing BoE rate path

LONDON (Reuters) - Sterling got only a temporary boost on Tuesday from data showing British inflation unexpectedly nearly hit a six-year high in November, with investors betting it would have little effect on how soon the Bank of England would raise interest rates again.

British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

Consumer price inflation hit an annual rate of 3.1 percent in November, the data showed, above economists’ average expectations in a Reuters poll for another 3.0 percent rise.

As that is more than a percentage point above the BoE’s 2 percent target, Governor Mark Carney will have to write a letter to finance minister Philip Hammond to explain what the BoE is doing in response.

But because one of the main reasons behind the surge in inflation has been the pound’s plunge since last June’s vote for Brexit - about 12 percent on a trade-weighted basis - the BoE has said it expects it to fall slowly over the next three years to just above 2 percent as sterling steadies.

The pound climbed to the day’s high $1.3380 after the data, but later slipped to $1.3319 as the dollar strengthened ahead of Wednesday’s expected U.S. interest rate hike, leaving sterling down 0.2 percent on the day.

“The market had geared up for an above-3-percent inflation reading today anyway – if you look at the spread of top-rated economists, about half of them were looking for 3.1 percent,” said Nomura currency strategist Jordan Rochester.

“The Bank of England had acknowledged there was a risk it would go higher, and also thought inflation would go to 3.2 percent last month. So the way the BoE could argue this is that this is just the FX devaluation feeding through just slightly higher than expected, but still feeding through,” he said.

Rochester said inflation would have to stay at elevated levels for another couple of months in order to prompt the BoE to shift to a more hawkish stance.

The BoE is widely expected to keep rates unchanged at 0.5 percent on Thursday.

Against the euro, sterling strengthened to 87.90 pence. The next point of focus for traders is wages data due on Wednesday.

“The pound’s losses could be contained if tomorrow’s data brings some good news,” said Fawad Razaqzada, an analyst at Forex.com

“The focus will then turn to the United States, where we will also have the latest CPI ahead of the expected Federal Reserve rate increase later on in the day.”

Analysts said any gains in sterling were being capped by uncertainty about Britain reaching a divorce agreement with the European Union over post-Brexit trade.

Reporting by Jemima Kelly,; Editing by Angus MacSwan and Ed Osmond

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