Sterling was buoyant near seven-and-a-half-year highs against a trade-weighted basket of currencies yesterday, drawing support from expectations that the Bank of England will start raising interest rates early next year.

Higher-than-expected core inflation in Britain along with comments from outgoing policymaker David Miles who said a UK rate hike would come “pretty soon” supported the pound, traders said.

It was up 0.2 per cent against the dollar at $1.5700, having hit a seven-week high of $1.5717 on Tuesday after the inflation data was released. It was slightly lower against the euro at 70.50 pence per euro.

Trade-weighted sterling was at 94.5, not far from a seven-and-a-half-year high of 94.8 struck on Tuesday.

“At the margin, the inflation report provides evidence that domestic cost pressures are rising, moving the BOE closer to raising rates,” said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.

Domestic cost pressures are rising, moving the BOE closer to raising interest rates

“We remain of the view that the pound will continue to outperform alongside the dollar as the BOE moves closer to raising rates from early next year,” Hardman added.

BOE rate-setter Kristin Forbes said on Sunday that interest rates would need to rise long before inflation hits the BOE’s two per cent target. Leaving them low for too long, she said, would risk undermining Britain’s economic recovery.

“We are looking for two signals to trigger the material pricing in of a February lift-off by the BOE,” said Viraj Patel, currency analyst at ING.

“Firstly, for headline inflation to move materially away from the zero per cent level as the negative effects of falling oil prices and sterling strength drop out and, secondly for external policymakers to follow up their hawkish statements by voting for a hike. Both signals may well materialise in early fourth-quarter.”