(Changes quote in 3rd graf to make it clear that the next rate hike will be sometime this year rather than June)
By Saikat Chatterjee
LONDON, March 21 (Reuters) - Sterling rose half a percent within reach of a one-month high after data showed British workers’ pay rose at the fastest pace in nearly 2-1/2 years in the three months to January, cementing expectations the central bank will raise interest rates in May.
The Office for National Statistics said workers’ total earnings, including bonuses, rose by an annual 2.8 percent — the biggest increase since the three months to September 2015 — after an upwardly revised 2.7 percent rise in the three months to December.
“After the labour market data today and transition deal earlier this week the balance has tipped for a May rate hike,” said Fidelity portfolio manager Chris Ellinger. “There is a nice positive boost to the upside. So this is a real reinforcement of the May hike and potentially another hike this year.”
Sterling extended gains after the data to peak at $1.4078, up nearly half a percent.
Before the data release, sterling was up nearly a quarter of a percentage point as the dollar eased.
Bond markets give a 70 percent probability of a rate increase by May and an 84 percent chance of two increases by the end of the year, Thomson Reuters data shows.
Against the euro, sterling traded up 0.25 percent at 87.23 pence.
Britain’s blue-chip FTSE 100 index weakened slightly and was last down 0.4 percent.
British government bond futures fell more than 30 ticks after the data, pushing two-year government bond yields 5 basis points higher on the day to 0.936 percent, their highest since May 2011, according to Tradeweb data.
With long positions in sterling whittled down in recent weeks after hitting a three-year high in late January, more upside room for the currency is likely if the Bank of England adopts a confident stance at Thursday’s meeting.
Bank of America Merrill Lynch strategists said that, with a May rate rise firmly embedded in the market, any sell-off in sterling would present a buying opportunity.
Reporting by Saikat Chatterjee Additional reporting by David Milliken and Kit Rees Editing by Catherine Evans and David Goodman