THE pound has hit a two-month low against the dollar, with the Bank of England's inflation report likely to dictate sterling's direction today as financial markets seek clues on the path of interest rates.

Sterling drifted to $1.6754 during yesterday's session, down more than 0.3 cents from its Monday close in London, a level not seen since before a key speech by Bank of England Governor Mark Carney on June 12. In this speech at the Mansion House in London, Mr Carney said the first rise in UK base rates "could happen sooner than markets currently expect" and warned the housing market was showing potential to overheat.

The pound recovered some ground later in yesterday's session and was trading about $1.6805 at 5pm, up 0.2 cents on the day.

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The feeling among economists has been that UK base rates are likely to rise from their record low of 0.5 per cent, where they have been since March 2009, either later this year or in early 2015.

Economists will be seeking further signals on the likely path of base rates from the Bank of England's latest quarterly inflation report, due for publication today, and the latest assessment of the situation by Mr Carney.

Sterling surged in the wake of Mr Carney's Mansion House speech in June. It climbed through the $1.70 mark on June 16 for the first time since August 2009.

It rose above $1.71 later in the month.

Minutes of the Bank of England's nine-strong Monetary Policy Committee have shown members have been unanimous, at least up until the July meeting, in voting to hold rates. Minutes of the August meeting are due to be published next week.