By Lucy Raitano LONDON, Feb 5 (Reuters) - Sterling and UK government borrowing costs fell on Thursday, as investors quickly priced in a much higher chance of a near-term rate cut, after the Bank of England said it expected a future cut if inflation continued to slow.

UK inflation rose more than expected to 3.4 per cent in December, ahead of the Bank of England’s decision on interest rates next month. Wednesday’s figure from the Office for National Statistics was above analysts’ 3.3 per cent forecast, according to a Reuters poll, and November’s reading of 3.2 per cent.

Inflation in the United Kingdom rose in December for the first time in five months, pushing further above the Bank of England’s target.

It is the last set of monthly inflation figures before the next interest rate decision on 5 February .

Consumer price inflation (CPI) in the UK surprised markets by rising to 3.4 percent in the year to December, up from 3.2 percent in November. This reading marke

Bank of England holds interest rate – but close vote shows inflation risk has eased - The Monetary Policy Committee vote turned out to be much closer than anticipated, with a 5-4 result paving the way

Gilts are rallying to start the year as the UK government shifts away from long-term borrowing and weaker inflation fuels bets on Bank of England interest rate cuts.