Sterling edges higher ahead of Bank of England decision

LONDON (Reuters) - Sterling edged higher on Thursday, as traders awaited a Bank of England meeting that will be watched for signs of whether recent progress in Brexit talks and higher UK inflation could speed up the pace of future interest rate hikes.

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Both financial markets and economists expect BoE officials will wait nearly a year before raising interest rates again -- a much slower pace of tightening than the U.S. Federal Reserve, which raised rates again on Wednesday.

But investors will scrutinise the Bank’s views on Brexit. The “very gradual” pace of tightening signalled by the BoE last month reflects both uncertainty about the economic impact of Brexit, as well as weak underlying inflation pressures that belie a headline rate at its highest in nearly six years.

Markets will be looking for signs that last week’s European Commission judgement that sufficient progress had been made in Brexit talks to move on to trade and transition negotiations has made the Bank more optimistic about Britain’s economy.

“It will be interesting to see whether the BoE explicitly acknowledges the latest constructive developments in Brexit talks today,” said ING strategist Petr Krpata.

“If so, one could see this as a hawkish development in the context of the Bank’s policy reaction function -- with risks that sterling moves back above $1.3450 on a steeper UK rate curve. A non-event should have limited downside for sterling.”

Data showing British retail sales grew much faster than expected last month as shoppers took advantage of Black Friday bargains gave sterling a brief extra boost.

The pound hit the day’s high of $1.3467 after the retail sales data, before slipping back to $1.3447, up 0.2 percent on the day, as the focus returned to the BoE.

Against the euro, the pound was up a quarter of a percent on the day at 87.91 pence.

Sterling was given no extra support on Tuesday by data showing inflation unexpectedly nearly hit a six-year high or 3.1 percent in November.

But some analysts said the stronger inflation numbers could drive a more hawkish tone from some BoE policymakers.

“We see the case for a slightly more hawkish tone, a case which is supported by recent inflation data as well as keeping the way open for a future interest rate hike,” said IronFX analyst Peter Iosif.

“(But) on the other hand the BoE may want to maintain flexibility as Brexit negotiations are still a concern.”

Editing by Catherine Evans