Sterling hits 20-month high vs euro on Bailey's fresh rate hike signals

* Graphic: World FX rates in 2021

* Graphic: Trade-weighted sterling since Brexit vote

Oct 18 (Reuters) - Sterling touched a 20-month high versus the euro on Monday after Bank of England Governor Andrew Bailey sent a fresh signal that the central bank is gearing up to raise interest rates as inflation risks mount.

Sterling has gained 5.5% versus the euro this year, with analysts pointing to expectations the BoE will raise rates as a main factor supporting the pound, while the British economy struggled with a shortage of labour, an energy crisis and rising COVID-19 cases.

During an online panel discussion on Sunday organised by the Group of 30 consultative group, Bailey said the BoE will “have to act” in its monetary policy meetings on the risk of medium term inflation.

He continued to believe that the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer.

On the expectations of rate hikes, short-dated British government bond yields jumped to their highest level since May 2019, with the 2-year gilt yield jumping by 16 basis points to reach a high of 0.747%.

Overnight, sterling jumped versus the euro to its highest of 84.25 since February 2020. By 0835, it lost some steam trading flat at 84.42 pence.

Versus a strengthening dollar, it edged 0.2% lower at $1.3717, but not far from a one-month high touched on Friday.

“Sterling was the biggest gainer overnight after Bank of England Gov. Bailey stated flatly that the British central bank is gearing up to raise interest rates,” said Marshall Gittler, Head of Investment Research at BDSwiss Holding.

The BoE looks set to be the first major central bank to raise interest rates since the beginning of the pandemic. Investors are betting on a rise to 0.25% by December.

Investors were awaiting CPI September inflation data for Britain due on Wednesday. (Editing by Peter Graff)