By Samuel Indyk
LONDON, Aug 17 (Reuters) - The British pound was steady on Wednesday as data showed inflation climbed to its highest level in more than four decades in July, heaping pressure on the Bank of England to bring down prices but increasing the risk of a sharper economic slowdown.
Consumer price inflation rose to 10.1% in July, its highest since February 1982, official figures showed. The increase was above economists' expectations in a Reuters poll for inflation to rise to 9.8%.
Higher-than-forecast inflation supports the view that the Bank of England will follow up last month's 50 basis point rate rise with a second consecutive half-point increase in September.
Money markets are pricing in about an 88% chance of a 50 basis point rate rise from the central bank next month, little changed from before the data, according to data from Refinitiv.
But traders are now pricing in a further 200 basis points of tightening by May next year, taking the Bank Rate to 3.75%. Prior to labour market data on Tuesday, traders expected interest rates to peak in March with a further 150 basis points of tightening, Refinitiv data showed.
Most economists in a Reuters poll this week, expect the BoE to raise interest rates by a further half point to 2.25% at its September meeting.
Even with inflation running at its highest level in decades, analysts said the outlook for the pound remained bleak as front-loading rate rises into a recession increases the risk of a hard landing for the economy.
"A more hawkish Bank of England policy path isn't necessarily supportive for the pound, as it comes at the expense of future growth conditions," said Simon Harvey, head of FX analysis at Monex Europe.
At 0837 GMT, the pound was up 0.1% at $1.2115.
Against the euro, sterling was flat at 84.055 pence, after earlier touching its strongest level against the single currency since Aug. 4 at 83.90 pence.
The BoE said this month it expected inflation was likely to peak at 13.3% in the fourth quarter, due mostly to the surge in energy prices following Russia's invasion of Ukraine.
(Reporting by Samuel Indyk; Editing by Robert Birsel)