Wires

UPDATE 1-Sterling falls, rate cut expectations rise after dismal UK inflation data

Yoruk Bahceli

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* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Updates with UK inflation data)

LONDON, Jan 15 (Reuters) - The pound fell on Wednesday after data showed UK inflation rose at its weakest rate in three years, ramping up expectations of a rate cut from the Bank of England at its January meeting.

Consumer prices rose at an annual rate of 1.3% in December compared with 1.5% in November, marking the smallest increase since November 2016, the Office for National Statistics said.

Market expectations had been for a 1.5% rise, according to a Reuters poll.

The numbers brought Britain's currency under further pressure. It has been falling in recent days after several policymakers, including Bank of England governor Mark Carney, hinted they could vote for a rate cut unless economic data improves significantly, raising expectations of a cut at the bank's Jan. 30 meeting.

These expectations increased further with worse-than-expected growth and industrial production data this week.

The pound fell as much as 0.25% against the U.S. dollar to $1.2985 following the inflation release and was last at $1.2997. It fell similarly against the euro to 85.68 pence.

Money markets now see a 61% chance for a 0.25% cut on Jan. 30, compared to 49% prior to the inflation reading.

"The number of doves is building and the data is supportive of rate cuts; so it's a question of at which meeting," said Kit Juckes, head of FX strategy at Societe Generale.

Prior to the inflation release, Bank of England interest rate setter Michael Saunders said he was sticking to his view that borrowing costs should be cut because of weakness in Britain's labor market and its broader economy.

"With limited monetary policy space, risk management considerations favor a relatively prompt and aggressive response to downside risks at present," he said.

Saunders' view of limited room to adjust policy came in contrast to Carney's statement last Friday, when he said combining possible interest rate cuts and the prospect of more asset purchases made the BoE's current armory the equivalent of cutting the Bank Rate by 2.5 percentage points.

(Reporting by Yoruk Bahceli; Editing by Mark Potter and Nick Macfie)