Sterling held steady on Wednesday after data showed the first annual drop in UK house prices in more than a decade, and traders focused on sticky inflation and the outlook for Bank of England monetary policy.

At 0821 GMT, the pound was flat against the dollar at $1.242, having earlier dropped by as much as 0.2% after the house price data. It was also flat against the euro at 86.07 pence.

The pound has slipped from an 11-month high of $1.26790 touched on May 10.

British houses prices fell on an annual basis in May for the first time in 11 years, mortgage lender Halifax said on Wednesday, as an increase in mortgage rates from the country's largest provider comes into effect.

"The bigger impact house prices have is in the equity markets, as they are important for housebuilders, and it is no surprise that we are seeing the likes of Persimmon and Redrow all trading lower this morning," Stuart Cole, chief macro economist at Equiti Capital, said. He added inflation and the rate outlook is a more important driver for now.

On May 26, data showed British inflation fell in April, but by less than expected. It remains above the rate of price growth in the United States and most of Europe. The data raised bets that the BoE will have to keep hiking interest rates.

The UK central bank will next convene on June 22, with traders betting on an 88% chance of a 25-basis-point rate rise. . The BoE has raised rates 12 times since late 2021 to 4.5% from just 0.1% in to try to calm inflation.

Britain's next consumer price index print is due on June 21, while labour market data is due on June 13, with both keenly anticipated for a steer on the BoE's next likely move.

Another point of focus for Cole is whether the BoE will end up hiking to the extent that it drives the economy into recession.

"That risk appears to have diminished of late, but if core CPI continues to perform strongly then I think they will start to resurface," he said.

(Reporting by Lucy Raitano; Editing by Barbara Lewis)