Rate rise expected as pound soars further

The pound hit its highest levels for six and a half years yesterday in the aftermath of the Budget. Although Gordon Brown, Chancellor of the Exchequer, insisted yesterday that he had taken tough measures to reduce the pressure on interest rates and the pound, the Bank of England's monetary policy committee was widely expected to increase the cost of borrowing after its meeting next week.

The pound ended the day at DM2.95, its old central parity in the European Exchange Rate Mechanism. Its index against a range of currencies rose to 103.5, the highest since the beginning of 1991, up from 101.7 before the Budget.

"The tax changes in the Budget will have a negligible impact on the economy. The Chancellor has handed the responsibility - and the blame - for managing the economy on to Eddie George," said Adam Cole, UK economist at James Capel.

Mr Brown said yesterday that he wanted a stable and competitive pound. "I wanted to mitigate the pressure on exporters," he said.

He said the Budget had set in place a framework for long-term stability which would boost investment. The new rules for government borrowing were extremely tough.

"When people look in detail at the figures they will recognise it as a significant fiscal tightening," Mr Brown said. He added that the reduction in mortgage interest tax relief and increase in stamp duty would stabilise the housing market.

However, many economists disagreed with this claim. David Miles, professor of economics at Imperial College, said: "There must be a lot of very relieved estate agents. If he was trying to put the brakes on the housing market, this won't do it."

Fresh evidence on the buoyancy of the service sector of the economy boosted the expectation that the Bank will take action very soon to prevent a full-blown consumer boom.

The newly established survey of services by the Chartered Institute of Purchasing and Supply, showed that activity remained very strong last month, although it had slipped back from May's heights. Expectations for future business picked up in June.

The Confederation of British Industry's monthly survey of the high street showed a pick-up in activity in June. Apart from footwear and leather goods retailers, all sectors reported an increases in sales from a year earlier and said they expected a further improvement.

Alistair Eperon, chairman of the CBI's distributive trades panel, said: "At first glance, the Budget seems unlikely to upset these expectations."