Stg hits 2-1/2 month low vs dlr, inflation data eyed

LONDON, May 12 (Reuters) - Sterling fell to its lowest in 2-1/2 months against a broadly stronger dollar on Monday, as poor UK economic sentiment kept investors focused on the prospect of more interest rate cuts from the Bank of England.

The BoE kept borrowing costs on hold last week after cutting the base rate to 5.0 percent in April, but investors expect an easing in June as the central bank tries to support a sharply slowing economy.

Recent data has shown falls in house prices, a decline in consumer confidence and slowing retail and manufacturing demand.

However the central bank's scope to ease rates is limited by persistent inflation and investors will watch Producer Price Index data at 0830 GMT and consumer price data on Tuesday for more clues on inflationary pressure.

"CPI tomorrow will show the extent of inflationary pressures, but I think the market has priced in enough easing from the BoE with two rate cuts by the end of the year ... so we will probably see some stabilisation in cable through this week," said Geoff Kendrick, currency strategist at Westpac.

By 0740 GMT the pound was down 0.2 percent at $1.9487, having fallen to its lowest since February 21 at $1.9445 <GBP=>. The euro was down 0.35 percent at 78.95 pence <EURGBP=>, hit by its weakness against the dollar.

Investors will look to the Bank of England's Inflation Report on Wednesday for more clues on monetary policy outlook. A Reuters poll showed analysts expect the BoE to raise its inflation profile and lower its growth forecast.

"The February Inflation Report indicated that around 50 bps of rate cuts would be needed to return inflation to target, of which the MPC (Monetary Policy Committee) has delivered 25 bps," said Barclays Capital in a research note.

(Reporting by Simon Falush; editing by David Stamp)