The pound fell on Wednesday after data showed UK inflation rose at its weakest rate in three years, ramping up expectations of a rate cut from the Bank of England at its January meeting.

Consumer prices rose at an annual rate of 1.3% in December compared with 1.5% in November, marking the smallest increase since November 2016, the Office for National Statistics said.

Market expectations had been for a 1.5% rise, according to a Reuters poll.

The numbers brought Britain's currency under further pressure. It has fallen in recent days after several policymakers, including Bank of England governor Mark Carney, hinted they could vote for a rate cut unless economic data improves significantly, raising expectations of a cut at the bank's Jan. 30 meeting. These expectations increased further with worse-than-expected growth and industrial production data this week.

The pound fell as much as 0.25% against the US dollar to $1.2985 following the inflation release, before recovering slightly against a broadly-softer dollar to around $1.30.

But sterling was still weaker against the euro at 85.65 pence, a quarter of a percent lower on the day. Money markets now see a 61% chance for a 0.25% cut on Jan. 30, compared with 49% prior to the inflation reading.

"The number of doves is building and the data is supportive of rate cuts; so it's a question of at which meeting," said Kit Juckes, head of FX strategy at Societe Generale.

Prior to the inflation release, BoE interest rate setter Michael Saunders said he was sticking to his view that borrowing costs should be cut because of weakness in Britain's labour market and its broader economy.

"With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present," he said. Saunders' view of limited room to adjust policy came in contrast to Carney's statement last Friday, when he said combining possible interest rate cuts and the prospect of more asset purchases made the BoE's current armoury the equivalent of cutting the Bank Rate by 2.5 percentage points.

"We expect two more rate cuts from the Bank of England," said Wouter Sturkenboom, chief investment strategist for EMEA at Northern Trust Asset Management. "Now that Brexit has been decided, they (BoE policymakers)finally have the political backdrop that allows them to respond to what they should have been responding to earlier in 2019, which is a weak growth and inflation environment."

In a further sign of building UK rate-cut expectations, British gilt yields fell sharply.

The 10-year gilt yield was down almost 9 basis points on the day at 0.64%, its lowest level since late November. It was set for its biggest daily fall since early September.