Sterling strength could keep UK inflation low: BoE's Carney

LONDON (Reuters) - Bank of England Governor Mark Carney signaled on Thursday he was in no rush to raise interest rates, saying the impact of sterling's rise and low global inflation could last for some time.

Carney said the Bank expected to make limited and gradual increases in rates over the next three years as inflation returned to target within two years, even though it fell to 0.3 percent in January.

Those comments echoed the message from the Bank's top policymakers in recent months. Carney also said BoE rate-setters should consider the risk that low foreign inflation and sterling's strength might persist.

"The bottom line is that there is a risk that the combination of persistently low global inflation and the strength of sterling could weigh on prices here for some time," Carney said in a speech at a manufacturing research center in Sheffield in northern England.

He said the pace and degree of the BoE's rate hikes would be affected by factors such as foreign prices and Britain's exchange rate, as well as domestic cost pressures.

British government bond prices rose in response to Carney's comments, before slipping back again.

Sterling touched a seven-year high against the euro on Wednesday, although it has suffered heavy losses against the dollar recently.

While the BoE would look through one-off shocks -- such as the plunge in global oil prices, "it may be appropriate to take into account persistent external deflationary forces arising from the combination of continued foreign low inflation and the protracted effects of sterling's strength on the prices facing UK consumers if those forces were to intensify," Carney said.

Some other policymakers have indicated they are closer than Carney to voting for rate hikes as Britain's economy continues to grow strongly.

On Wednesday, policymaker Martin Weale said the fall in oil prices had given the BoE only breathing space to keep interest rates on hold, while his colleague Kristin Forbes has warned inflation pressures could pick up quickly.

"Today's comments certainly suggest that (Carney) is on the more cautious side and that he doesn't want to take any risks until there is clear evidence that inflation has reached a trough," said Nick Stamenkovic.

"The chances of a rate hike before year-end look relatively slim unless wage pressures start to build significantly."

(Additional reporting by London bureau; Editing by Mark Heinrich)