Sterling gains, UK sales diminish BoE rate cut view

By Naomi Tajitsu

LONDON, May 22 (Reuters) - Sterling rose on Thursday after a smaller-than-expected fall in UK retail sales and factory orders suggested that the Bank of England may put off cutting interest rates in coming months as it tackles rising inflation risks.

Retail sales fell 0.2 percent in April from March, clocking a second monthly slide but coming in slightly stronger than forecasts for a 0.5 percent fall. The previous month's figures were also revised to show a smaller fall [ID:nL22586765].

A manufacturing trends poll put the balance of UK factory orders at -10 in May, slightly stronger than forecasts for -12 but still falling for the second month in a row [ID:nL21921682].

While the sales data showed that sluggish spending may continue to weigh on the economy, analysts said the state of the economy still allowed the BoE some leeway to keep monetary policy tight in the light of inflation presssures.

The most recent evidence of higher prices came in the form of the industrial trends survey, which also showed that firms expect to raise prices at the fastest rate in 13 years.

With oil prices hitting record highs, some said that currencies whose central banks are intent on stamping out inflation risks -- like the BoE and the European Central Bank -- were being rewarded, as risks to their official rates were tilted to the upside.

"Sterling is in the process of being reassessed," said Geoffrey Yu, currency strategist at UBS Warburg in Zurich.

"With its current stance of targeting inflation and not cutting rates aggressively to begin with, people may be thinking the BoE's policy is a good one in the longer run."