Sterling steady after UK inflation, eyes turn to BoE

By Samuel Indyk

LONDON, Sept 16 (Reuters) - The British pound was little changed against the euro and the dollar on Wednesday as underlying readings of UK inflation held steady in August, even as headline consumer price inflation accelerated to a five-month high.

The headline consumer price index rose to 3.1% in August compared with a year ago, its highest level since March, official figures showed just a day before the Bank of England's policy decision.

But core inflation, which excludes volatile items such as food and energy prices, held at 2.6% for the fourth month in a row.

"The inflation data continues to show few signs of a broader increase in prices that indicates a risk of inflation persisting after the energy price shock fades," said Andrew Wishart, senior UK economist at Berenberg.

The pound was little changed against the dollar at $1.3471, but remains close to the one-month low of $1.3464 reached last week.

Against the euro, the pound was flat at 85.66 pence.

EYES ON BOE

Markets are now turning their attention to the BoE's policy announcement on Thursday, when they are expected to keep interest rates unchanged.

A surge in energy prices since the outbreak of the Iran warat the end of February pushed investors to price in tighter policy from global central banks, including the BoE.

Investors are pricing in around a 20% chance of a quarter-point interest rate hike to 4%, but are fully pricing in a hike at the November meeting and see more in 2027.

Prior to the Iran war, investors had been expecting the BoE to embark on a rate-cutting cycle this year.

"With the labour market on the weak side, inflation not ticking up that much, and underlying inflation where it is, it should keep a rate hike at bay," said Kirstine Kundby-Nielsen, senior FX analyst at Danske Bank.

"If they end up being more dovish and not hiking, then it should give some room for the pound to weaken."

(Reporting by Samuel Indyk; Editing by Hugh Lawson)