LONDON, Aug 31 Reuters Sterling is set for its worst month since late 2016 against the dollar and its worst versus the euro since mid2021 as fears the British economy is slowing sharply just as inflation gathers pace has sent investors rushing to sell the currency.

As of 0930 GMT, the pound was down 4.4 for the month of August and last at 1.1645 , which would eclipse a loss of 4.3 in April. On Monday sterling fell to its weakest since March 2020, when panic about the spread of COVID19 hit markets.

Despite a small rebound on Tuesday to 85.82 pence , versus the euro the British currency has shed 2.2, putting it on course for its weakest month since April 2021.

The weakness against the euro, which has been battered by concerns about shortages and soaring prices of natural gas, underlines how widespread market jitters are about Britain.

Inflation is at 10 and predicted to climb higher, squeezing the pay packages of hardhit consumers further. British government bonds are on course for their biggest monthly fall since 1994 as investors dump Gilts.

Scotiabank39;s chief FX strategist, Shaun Osborne, said money markets now point towards the Bank of England raising interest rates to 4.25 next year, up from a current 1.75.

This would leave the BoE policy rate among the highest of the major economies but that may still not compensate investors sufficiently for inflation that is expected to run well into double digits early next year while the economy tilts into recession, he…