LONDON, Sept 20 Reuters Sterling fell to its lowest since late May, while UK government bonds and stocks rallied on Wednesday as data showing inflation slowed more than expected in August raised the possibility that the Bank of England could pause rate hikes this week.

British annual consumer price inflation fell to 6.7 last month. Economists polled by Reuters had forecast CPI would rise to 7.0 from July39;s 6.8 after a jump in fuel prices and an increase in a tax on alcoholic drinks.

Sterling was last down 0.23 on the day at 1.2363, having fallen to as low as 1.2334 just after the data, its lowest since May 30.

That fall came as investors scrambled to reel in bets that the BoE will raise interest rates again on Thursday.

Traders think there39;s a 60 chance the Bank leaves rates unchanged, up from 20 on Tuesday, according to pricing in derivatives markets.

They now see a 40 chance of a 25basispoint increase to 5.5, an outcome which was priced as a nearcertainty only a month ago.

In bond markets, interest ratesensitive twoyear gilt yields slid 14 bps to 4.86 as investors rushed into British bonds, putting it on track for the biggest daily fall since Aug. 23. Yields move inversely to prices.

The benchmark 10year Gilt yield was last down 9 bps at 4.254. It earlier fell to 4.239, the lowest since late July.

Goldman Sachs added to a bullish feeling in UK bond and equity markets after it said it now thinks the BoE is already finished hiking rates.

Britain39;s FTSE 100…