Sterling steady as traders remain cautious about efforts to end Iran war

By Sophie Kiderlin

LONDON, March 25 (Reuters) - Sterling was steady on Wednesday with traders cautious about efforts to end the U.S.-Israeli war against Iran as they took stock of the conflict's potential economic impact.

The pound GBP= was last little changed against the dollar at $1.3402.

Israel and Iran exchanged airstrikes on Wednesday, as Iran's military rejected U.S. President Donald Trump's assertion that Washington was in direct negotiations with Tehran to end the war.

Oil prices eased, with Brent crude futures LCOc1 last down around 5.4% at $95.82 a barrel.

Meanwhile, British consumer price inflation held at 3% in February, unchanged from January's rate, official figures showed on Wednesday, ahead of a likely upward lurch as the war in the Middle East pushes up prices.

“Today’s inflation report is little more than a relic of the world before the Iran conflict. While the February report was broadly in line with expectations, and confirms that inflation was on a path back to 2%, the outlook for inflation has radically changed," Luke Bartholomew, deputy chief economist at Aberdeen, said.

Inflation expectations have picked up sharply since the start of the Iran war as oil prices have spiked.

An indication that the war in the Middle East is affecting the British economy came on Tuesday as a survey showed that British business activity grew at the slowest pace in six months in March and manufacturers' input costs saw the biggest month-on-month acceleration since 1992.

BANK OF ENGLAND RATE HIKES?

As economic expectations have shifted, so have Bank of England interest rate projections.

Markets were last pricing in a roughly 67% chance of the BoE hiking rates at its next meeting in April, and were projecting at least two policy increases by the end of the year. Before the Middle East conflict, the BoE had been expected to cut rates twice this year.

Many economists, however, appear more cautious about potential rate hikes than markets.

"How the BoE reacts will depend on whether the upward pressure on inflation from the rise in energy prices puts upward pressure on prices beyond energy itself and food and manufactured goods, where it is a key input. We doubt that it will," Andrew Wishart, senior UK economist at Berenberg, said.

"Sluggish economic growth and a growing margin of slack in the labour market suggest that firms’ pricing power and workers’ bargaining power are insufficient for a new price-wage spiral to begin."

Sterling was last steady against the euro EURGBP= at 86.54 pence.