* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds more on banks' expectations for interest rates, updates prices)
By Patrick Graham
LONDON, June 23 (Reuters) - Sterling gained by almost half a percent against the dollar on Friday, helped by a shift in expectations for interest rates that has some in the market backing the Bank of England to raise borrowing costs within months.
Analysts from Japanese bank Nomura were the first major house on Thursday to flip to calling for a rise in rates this year, after the defection over the past week of three members of the BoE’s policy committee to the camp backing higher rates.
Policy hawk, Kristin Forbes, in her last speech before leaving the bank, urged colleagues on Thursday evening to raise rates immediately to quell the inflation pressure stemming from a weaker pound.
Sterling racked up a solid 0.4 percent gain against the dollar on Friday, to trade at $1.2732. It was flat at 87.95 pence per euro.
“We think rates will be on hold for the next year - but the market has definitely started pricing in the chance of a hike in the next six months,” said Rabobank strategist Piotr Matys. “That is clearly giving sterling some support.”
Short-term UK market interest rates have shifted since a speech by the Bank’s chief economist, Andy Haldane, earlier this week, with short sterling pricing in a strong chance of a rise in rates by December.
Barclays economists said that while they stuck with their call for rates to stay on hold, there was a risk the Bank would hike in November, and start to prepare markets for that move in August.
U.S. bank JP Morgan also warned that the risks of a rise this year had increased, given a series of higher-than-expected inflation numbers, which most put down to the weakness of the pound.
“The BoE has signalled it has limits about the scale of the overshoot it is willing to tolerate - especially given the persistence of currency-induced shocks on inflation,” JPM economist Allan Monks said in a note on Friday.
Governor Mark Carney, however, said earlier in the week it was too early to move, and any rise in rates would put aside signs that the UK economy - and household demand - are currently ill-equipped to swallow higher borrowing costs.
The pound continues to suffer because of political uncertainties generated by Brexit talks and a snap election this month which left Prime Minister Theresa May short of a majority in parliament.
“We’re not here to tell the BOE what they should do, we’re here to figure out what they are most likely to do,” Nomura’s Jordan Rochester said in the bank’s note to clients changing its forecast for UK rates.
“Whilst it may not be in line with Governor Carney’s Mansion House speech, we ... now expect the MPC to raise rates for the first time in a decade at its next meeting in August.” (Editing by Richard Balmforth)