Sterling mired near 3-mth low vs dlr on poor outlook

LONDON, May 15 (Reuters) - Sterling was trapped on Thursday near three-month lows hit the previous day against the dollar, strangled by the prospect of inflation staying higher for some time to come while economic growth slows.

The Bank of England's quarterly inflation report made bearish reading on Wednesday, highlighting the tangle faced by policymakers trying to balance rising inflationary pressures from sky-high commodity prices against economic damage from the ongoing global credit crunch.

The report hacked away at expectations for UK interest rates to be cut in June from the current 5 percent, leaving the pound severely pressured as investors worried about future damage to the economy from the inflation versus slowing growth conflict.

UK Prime Minister Gordon Brown weighed into the rate debate earlier, saying he hoped that the BoE would be able to cut rates further, but after lifting the pound briefly his comments were discounted.

"The inflation report dominates, as it was pretty damning. It expected growth to have a downside risk and inflation to have an upside risk," said Naeem Wahid, currency strategist at Bank of Scotland Treasury Services.

By 0841 GMT, sterling was flat on the day at $1.9455, having hit a three-month low on Wednesday at $1.9363 <GBP=>. The euro rose 0.3 percent to 79.74 pence <EURGBP=>.

BoE Governor Mervyn King said on Wednesday the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".

A poll carried out after the BoE report showed it would hold off from growth-boosting rate cuts until the third quarter as it battles soaring inflation [BOE/INT].

(Reporting by Veronica Brown; Editing by Ruth Pitchford)