LONDON: Sterling rose and British government bonds fell on Tuesday after data showed British inflation jumped unexpectedly in June to its fastest rate since January, increasing market bets that interest rates will 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, a 4-1/2 year low.
Sterling surged to the day's high of $1.7147 after the data from $1.7078 beforehand, up a third of a percent and close to a near six-year high of $1.7180 hit earlier this month.
The euro fell to a one-week low of 79.27 pence from 79.755 beforehand, down half a percent on the day.
Short sterling rate futures fell and the sterling overnight index swap curve implied a slightly increased risk of a rate hike in December.
Inflation had largely been declining over the past year, and remains below the Bank of England's 2 percent target, allowing the central bank to hold off on raising interest rates despite Britain's surprisingly strong economic recovery.
"One of the angles for the BoE moving less quickly ... was that they had a bit of breathing space provided to them by the fact that inflation was below target," said Daragh Maher, a currency strategist at HSBC in London.
"This spike higher today means that breathing space is less, but what we don't know is how much the BoE will put on this spike."
BoE Governor Mark Carney, appearing before British members of parliament, said inflation expectations were extremely well anchored and had improved over the past year.
"The only guidance that the new MPC (monetary policy committee) is now giving is around the expected medium-term path of interest rates, not the timing of the first rate rise," he said.
British 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, and were last 16 ticks lower at 110.49.
Britain's benchmark FTSE 100 index pared gains. The index was up by 0.2 percent before the data was published then edged back. It was last down 0.2 percent at 6,735.13.02 points.
Separate data released on Tuesday 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.
CONTRAST
Tuesday's numbers contrast with a run of recent lacklustre data, which had helped push sterling to a two-week low of $1.7059 earlier in the day.
The stronger data will increase market expectations that the BoE will raise interest rates for the first time in seven years in the coming months.
Valentin Marinov, a currency strategist at Citigroup, said the risk of Scotland voting for independence could discourage buying sterling against the dollar ahead of a Sept. 18 referendum.
A study by Morgan Stanley on Monday found that if Scotland splits off from the rest of the United Kingdom, that could see the value of sterling drop by up to 10 percent, exposing the rest of the country to more financial risk and delaying any interest rate hike until after May's general election.
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