Sterling keeps rising after the Bank of England raised the bar on rate cuts

LONDON, Dec 22 (Reuters) - The pound rose on Monday, building on gains made last week after the Bank of England delivered a widely expected rate cut, but suggested that the bar for further declines was high, given persistent inflation.

Sterling was up 0.48% against the dollar at around $1.3438, having ended the previous week flat after hitting a two-month high. It is up over 1% so far this month, bringing the gain for the year to around 7%.

But the currency has struggled against the euro, which is up nearly 6% against the pound this year, set for its strongest annual performance since 2016, when the Brexit vote took place.

INTEREST RATES DETERMINE STERLING'S PERFORMANCE

Interest rates are playing a leading role in sterling's performance. With the Federal Reserve expected to deliver at least two more rate cuts next year, the dollar is under pressure against most currencies, while the European Central Bank is widely believed to have finished cutting rates for now. 

That leaves the pound with a theoretical edge over the U.S. currency, but at a disadvantage to the euro.

The BoE, meanwhile, cut rates by a quarter point to 3.75% in a narrow vote that suggested some policymakers remain concerned about the level of inflation. The decline in November to 3.2% helped to make the case for last week's rate cut, but that rate is still well above the BoE's 2% target and wage growth is slower, but still elevated.

Governor Andrew Bailey said after the BoE decision, the overall trend for interest rates was down, but this might not happen as quickly as some analysts expect.  

Data from the Office for National Statistics on Monday showed Britain's economy grew by 0.1% in the July-to-September period of this year. This was in line with the office's initial estimate, while economists polled by Reuters had also forecast the reading would be unrevised.

Last week, the BoE said it expected zero GDP growth in the October-to-December period but it thought that the underlying pace of economic growth was around 0.2% per quarter.

“With the Bank of England expecting growth to come to a standstill in the last few months of the year, thanks in part to the impact of the Budget on overall confidence, it’s clear there are huge challenges to overcome if the UK’s growth story is going to become more compelling," Danni Hewson, AJ Bell head of financial analysis, said.

Money markets show traders think the Bank will deliver at least one rate cut in the first half of the year, and place a roughly 50% chance on a second before the year-end.

(Reporting by Amanda Cooper; Editing by Barbara Lewis)