(Updates after testimony, adds quote, comments)
By Jemima Kelly
LONDON, Feb 21 (Reuters) - Sterling edged up modestly from a one-week low against the dollar on Wednesday, after the Bank of England's chief economist said interest rates might need to rise faster than markets expect to keep inflation in check.
In an annual report to parliament, Andy Haldane said the risks to the BoE's latest projections, for both UK demand and inflation, were to the upside, and that both the global economy and Britain could well do better than the BoE's most recent forecasts.
Meanwhile, BoE Governor Mark Carney, appearing alongside Haldane and Deputy Governor Ben Broadbent, said there was no need to give a direct commitment on rates because markets, which have largely priced in an interest rate hike in May, had broadly understood the BoE's message.
"Sterling seemed to catch a bid when Haldane started speaking," said Neil Jones, Mizuho's head of currency hedge fund sales. "That's what turned things around."
"All three BoE speakers (looked) relatively upbeat, (so that was) a triple whammy for a higher pound," he added.
By 1745 GMT sterling was trading at $1.3959, still down 0.3 percent on the day but higher than the levels of around $1.3935 it had traded at before the testimony.
The pound had earlier sunk to as low as $1.3905, after data showed Britain's unemployment rate rose unexpectedly for the first time in almost two years in the three months to December.
Average earnings growth - a key metric in the BoE's deliberations over when and how quickly to raise interest rates - was unchanged over the whole period but jumped in December, the Office for National Statistics said.
Analysts said the unexpected tick higher in the jobless rate - to 4.4 percent from 4.3 percent in the previous three months - was a mild negative, but would not be likely to shift expectations of a rate hike in May.
"All in all, this was not very inspiring data," said Societe Generale currency strategist Alvin Tan. "We don’t think it really moves the needle (with respects to expectations) for a BoE hike in May."
Against the euro, sterling traded flat at 88.26 pence .
Analysts said a letter from 62 Conservative lawmakers to Prime Minister Theresa May demanding a quick, clean break from the European Union was also weighing on sterling.
The group of eurosceptic parliamentarians within May's own party demanded a tougher approach in a number of areas, including Britain's right to move away from EU rules after leaving and the terms of any transition period, raising pressure on the prime minister to take a "hard Brexit" stance.
May will host senior ministers at her country residence Chequers on Thursday to try to broker an agreement between the factions. She is then expected to set out her plans in a speech in the next few weeks, before formal trade talks begin in March. (Additional reporting by Tommy Wilkes; Editing by Mark Heinrich)