By Ritvik Carvalho

LONDON (Reuters) – Sterling set a fresh 2-1/2 year high against the dollar and a new 8-month high against the euro on Thursday on hopes that Britain’s brisk pace of COVID-19 vaccinations would lead to a relatively quick rebound in economic growth.

With a Brexit deal in the bag, Britain’s lead in vaccinations, along with lowered expectations of negative interest rates from the Bank of England, has boosted the pound against the euro.

The pound is up 1.2% against the single currency this year, and 0.7% this week. Speculators increased their long positions on the pound last week to their highest since September last year. [IMM/FX]

By 1543 GMT, sterling was up 0.5% against the dollar, having hit a fresh 2-1/2 year high of $1.3745.

Against the euro, it hit a new high of 88.30 pence, its highest since May 2020. ING said it expected sterling to gain to 88 pence per euro.

“If you look at the current status of the vaccination process, the UK is leading here in Europe and it’s also still vaccinating at a faster pace than in most of the big EU countries,” said Mikael Milhøj, senior analyst at Danske Bank.

“Also, you can see that the support for getting vaccinated in the UK is much higher than in Germany, Italy, Spain and especially of course in France. And that means that the UK economy may exit this COVID-19 crisis before the rest of Europe does and that I believe should have a positive impact on sterling.”

Milhøj added that he does not expect the Bank of England to take UK interest rates into negative territory.

Bank of England Governor Andrew Bailey said on Wednesday he expected Britain’s economy would recover strongly as the country moves ahead with vaccinating its population against COVID-19.

Bailey’s comments in a BoE online event for the public came a day after the central bank’s chief economist Andy Haldane said he expected the economy to begin to recover “at a rate of knots” from the second quarter.

The BoE is due to publish new growth forecasts on Feb. 4 alongside a report on the feasibility of cutting interest rates below zero to boost growth, as has been done already in the euro zone and Japan.

British inflation gathered speed in December, starting what is expected to be a climb this year as pandemic-fighting measures, Brexit and a recovery in the economy combine to push up costs for consumers and businesses.

Consumer prices rose 0.6% in annual terms after a 0.3% increase in November, the Office for National Statistics said. A Reuters poll of economists had pointed to a rate of 0.5%.

(Reporting by Ritvik Carvalho; Editing by Andrew Cawthorne and Peter Graff)