LONDON, June 15 (Reuters) - Sterling surged to its highest in a week against the euro on Thursday after as many as three members of the Bank of England's policy committee surprised financial markets by voting for a rise in interest rates.
Trading below $1.27 before the Bank's decision, the pound also leapt a full cent to $1.2795 after it emerged that Ian McCafferty and Michael Saunders had voted with existing policy hawk Kristin Forbes for higher borrowing costs.
The split votes comes at a time when the Bank has blamed a rise in inflation far above its 2 percent target on a weak pound and was taken as a warning that officials could seek to defend the currency with rhetoric or action even as the economy overall slows.
It was also just the latest surprise in a week which has seen the pound slump after Prime Minister Theresa May lost her parliamentary majority in an early election.
"There is a clear emphasis on the risk of a sustained inflation overshoot and the Bank of England probably does not want to be seen as being dismissive of such concerns," said Geoffrey Yu, Head of the UK Investment Office at UBS Wealth Management.
Short sterling contracts for December of this year moved 6 basis points, raising the likelihood attached to a rise in the bank's main interest rates before the end of 2017 to around 30 percent.
Two-year gilt yields hit their highest since May 10 as prices tumbled, and the euro zone's benchmark German 10-year bond yield also hit a day's high of 0.265 percent.
But the implications for growth and company profits in an economy already slowing sharply were evident in a slump for both Britain's main FTSE 100 index and more domestically focused mid-caps.
The FTSE 100 hit a session low of 1.1 percent while mid-caps saw their sharpest one-day fall in nearly a year, down 1.9 percent.
Other analysts emphasized that the vote may be chiefly a way of the Bank supporting the pound without actually changing policy conditions, noting also that Forbes is due to leave at the end of the month.
"With the economic outlook still challenging, wage growth will likely remain weak which should act as a drag on longer term inflation once the currency impact passes," said Oanda analyst Craig Erlam.
"(That's) assuming we dont see further dramatic shifts lower in sterling." (Reporting by Helen Reid, Ritvik Carvalho, Patrick Graham and John Geddie; Editing by Hugh Lawson)