Sterling consolidates above 2021 lows as central bank eyed

LONDON, Dec 1 (Reuters) - The British pound inched higher on Wednesday but held near a 2021 low versus the U.S. dollar as doubts grew on whether the Bank of England will raise interest rates at a policy meeting this month.

In early London trading, sterling edged 0.2% higher to $1.33 after falling briefly below $1.32 to a fresh 2021 low in volatile trading on Tuesday.

Against the euro, the pound retreated from a two-week low versus the pound to stand at 85.05 pence.

The BoE said in November it would probably have to raise rates from its all-time low of 0.1% "over the coming months", but policymakers have sounded increasingly divided on this prospect after a new coronavirus variant was detected.

Money markets were pricing in only 9 bps of rate hikes by the next meeting on Dec. 16 compared to 8 bps on Tuesday.

Meanwhile, the dollar was supported by hawkish comments from the U.S. Federal Reserve Chair Jerome Powell on Tuesday. Powell said asset purchases may need to be tapered faster to fight rising inflation, prompting traders to increase bets of a U.S. rate hike by next June.

Two-year British bond yields held within striking distance of one-month lows, weighing on the pound.

Yet, the pound was supported by improving risk appetite as global stock markets bounced back after falling on Tuesday on the back of concerns over the new coronavirus variant Omicron. Expected gauges of currency volatility in the pound stepped back from recent highs.

(Reporting by Saikat Chatterjee; Editing by Ana Nicolaci da Costa)