Pound rises after minister says any UK-EU treaty would be debated

* Graphic: sterling and gilt yields http://bit.ly/2dgAXn1

* Graphic: sterling year-to-date http://tmsnrt.rs/2egbfVh

By Jemima Kelly

LONDON, Oct (Shenzhen: 000069.SZ - news) 26 (Reuters) - Sterling hit a two-day high on Wednesday after a government minister said both houses of parliament would have to examine any new treaty emerging from Britain's renegotiation of its relationship with the European Union.

Sterling hit $1.2245 after the comments from junior Brexit minister David Jones, having already been trading higher as expectations for a UK interest rate cut next week faded. Against the euro, it hit the day's high of 89.19 pence .

Mizuho's head of hedge fund FX sales, Neil Jones, said Jones's comments had been interpreted as sterling-positive, as parliament is seen favouring a "soft" Brexit, in which Britain maintains its access to the single market.

"At the moment sterling is a function of: does the UK stay in the single market or not?" he said. "Anything that potentially suggests it could be harder for sterling to leave the single market would be a buy for sterling."

Having fallen to as low as $1.2082 on Tuesday, its weakest since Oct. 7, when a "flash crash" wiped as much as 10 percent off the currency's value in a matter of minutes, the pound had on Tuesday recovered about 1 cent after Bank of England Governor Mark Carney said the central bank could not ignore the pound's "fairly substantial" recent drop.

Carney said there were limits to the central bank's ability to overlook the effect of the steep slide - about 18 percent since the Brexit - on inflation, and it would "undoubtedly" take it into account at its rate-setting meeting next week.

In early September the BoE (Shenzhen: 200725.SZ - news) said it was likely to cut rates again this year if the economy slowed as it expected. But sterling's weakness and unexpectedly robust economic data have prompted most to rule out a Nov. 3 cut - around three quarters of the 60 economists polled by Reuters in the past few days expect rates to stay at 0.25 percent for the rest of the year.

"Many saw (Carney's comments) as an indication that the BoE will leave policy unchanged ... next week," wrote Credit Agricole currency strategists in a note to clients.

"Further underpinning the pound is the assumption that the economy will not need another shot of monetary stimulus anytime soon. If that were not the case and the BoE had to ease but were unable to for fear of fuelling inflation, the sterling response would have been negative." (Reporting by Jemima Kelly)