Sterling surges, gilts fall after surprise UK inflation jump

LONDON, July 15 Tue Jul 15, 2014 4:48am EDT

LONDON, July 15 (Reuters) - Sterling rose and British government bonds fell on Tuesday after UK inflation jumped unexpectedly in June to its fastest rate since January, picking up from a 4-1/2 year low and increasing the likelihood of an interest rate rise this year.

Consumer prices rose 1.9 percent on the year in June, the Office for National Statistics said. Economists taking part in a Reuters poll had expected inflation to accelerate to 1.6 percent from 1.5 percent in May.

Sterling surged to a high for the day of $1.7141 after the data from $1.7078 beforehand, up a third of a percent.

The euro fell to 79.36 pence from 79.755 beforehand, down almost a half of a percent on the day.

UK two-year gilt yields rose 4 basis points to above 0.87 percent and September gilt futures dropped more than 30 ticks to turn negative on the day, standing 16 ticks lower at 110.46.

Short sterling rate futures <0#FSS:> moved deep into negative territory.

Ten-year gilts' yield spread over Bunds widened by 3 basis points to over 143 basis points, their highest since July 9.

Britain's benchmark FTSE 100 index pared gains. The index was up by 0.2 percent before the data was published then edged back to stand 0.1 percent higher at 6,754.02 points.

Separate data showed house prices also picked up speed, with property prices in London jumping by a record 20.1 percent over the 12 months to May. (Reporting By Jemima Kelly, editing by Nigel Stephenson)