Ahead of next week's meeting of the Bank of England's Monetary Policy Committee, the latest business survey showed a surprise pick-up in manufacturing last month, as strong domestic orders outpaced a drop in export orders for the third month running.
The pound remained at its uncomfortably high level, with the index edging up by 0.1 to 108.9. The dollar also crept higher, boosted by a similar survey showing strong activity in industry.
The Conservatives tried to make political capital out of the mounting complaints of exporters, with William Hague, the Tory leader, warning in the House of Commons that manufacturing industry was being driven to the brink of recession.
Tony Blair replied: "It is vital that decisions in respect of the pound and economic policy are taken on a long-term, not short-term, basis so that we never go back to Tory boom and bust."
In a speech last night, Eddie George, governor of the Bank of England, described movements in sterling as a "roller-coaster ride" and said the strength of the pound posed a real dilemma on monetary policy. He said the Bank did take full account of the impact of the strong pound on activity in assessing policy.
But he said: "It nevertheless remains at the margin a fine judgement whether domestic demand will in fact slow soon enough and fast enough to avoid inflation eventually picking up."
While giving no clue about the likely outcome next week, he echoed the Chancellor of the Exchequer in concluding: "At the end of the day it cannot make sense to sacrifice our objective of long-term domestic stability."
Meanwhile, there was no let-up in the pressure from industry. The Institute of Management reported that among a small survey of its members, six out of 10 in manufacturing wanted to see a reduction in interest rates, while in services more than five out of 10 thought they should stay the same. Predictably, only a minority saw any case for higher interest rates.
Attention today will focus on Mr George, who is due to give evidence to the Treasury Select Committee. But City analysts predicted that the outcome of next week's meeting of the MPC would be another split vote resulting in no change in the cost of borrowing from the current level of 7.25 per cent.
Yesterday's survey from the Chartered Institute of Purchasing and Supply showed an acceleration in manufacturing activity, with the index rising to 52.2 from 51. It has been above the watershed of 50 for 22 months running.
Home demand for consumer goods was particularly buoyant, with output expanding in March to meet stronger order books.
Peter Thomson, director-general of the CIPS, described the results as "subdued", pointing to a drop in export orders for the third month running. In addition, respondents reported a fall in employment for the first time since August, and the price of raw materials fell for the 30th consecutive month.
Figures from the Halifax showed that house prices rose by 0.6 per cent in March.Reuse content