By Joice Alves

LONDON (Reuters) – Sterling rose on Monday after Bank of England Deputy Governor Ben Broadbent warned Britain’s tight labour market will add pressure on inflation, reigniting some hopes for an interest rate hike.

After Friday’s slump, sterling strengthened 0.1% versus the dollar, to $1.3238 at 1540 GMT, remaining not far from a 2021 low of $1.3194 touched last week.

Versus the euro, the pound was 0.3% higher at 85.21 pence, after touching a three-week low of 85.52 pence on Sunday at 2111 GMT.

Sterling strengthened after the BoE’s Broadbent said Britain’s tight labour market was likely to be a more persistent source of inflation. He said inflation might “comfortably exceed” 5% in April next year and that transitory inflation should be understood as referring to the next 18-24 months.

Broadbent’s warnings chimed with remarks from BoE policymaker Catherine Mann last week that the Omicron variant of COVID-19 could bring more inflation if consumers switch demand again from services to goods, said Jane Foley, head of FX strategy at Rabobank.

“This re-focuses attention on the possibly of rate hikes from the Bank, though the market is far from convinced about a move next week,” Foley said.

Markets now broadly expect the BoE to keep interest rates unchanged at its Dec. 16 policy meeting as the Omicron variant spreads across the world.

On Friday, BoE policymaker Michael Saunders, who voted for an interest rate hike in November, said he wanted more information about the impact of Omicron before deciding how to vote this month.

Unwound expectations for a December rate hike worsened the outlook for the pound, which is unlikely to be able to hold on to gains, said Foley.

Positioning has moved heavily against sterling with real money investors extending net GBP shorts to levels not seen since October 2019, said Jeremy Stretch, head of G10 FX strategy at CIBC.

(Graphic, GBP Positions: https://fingfx.thomsonreuters.com/gfx/mkt/zdpxoxrlwvx/GBP%20positions.png)

“Clearly, Omicron-related uncertainty risks is compromising the prospect of a December move,” Stretch said.

Broadbent said he did not know whether he would vote to raise interest rates in December, but noted the BoE’s forecasts showed a need for higher borrowing costs ahead.

(Reporting by Joice Alves; Editing by Alex Richardson and Catherine Evans)