Sterling rises sharply as new data fuels expectations of rate increase

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The Independent Online
THE POUND rose sharply yesterday as the prospect of a rise in interest rates after this week's meeting of the Monetary Policy Committee loomed larger.

News earlier this week of a stunning jump in house prices in October was the latest in a series of figures and surveys showing the economy accelerating. The monthly increase of 2.8 per cent was the biggest since 1988, the height of the housing market boom, according to Halifax.

The MPC will also hear a presentation from Gus O'Donnell, the Treasury's representative, on the tax and spending plans that Gordon Brown, the Chancellor, is to set out in next week's pre-Budget report.

"The pressure for a rise in rates comes from evidence that the economy is accelerating much more rapidly than expected a few months ago," said Michael Saunders, an economist at Salomon Smith Barney.

Some analysts still argue the monetary committee could spring a surprise decision not to move rates this month, not least because of the strong pound.

Neil Parker at Royal Bank of Scotland said: "The MPC will sit down with very little having changed this month compared with last month."

However, with a majority in the City firmly expecting a quarter or even half-point increase in interest rates from their current level of 5.25 per cent, the sterling index climbed to 106.1 yesterday, up from 104.2. The pound strengthened against both euro and dollar.

Financial markets also expect the European Central Bank to raise its key interest rates tomorrow, and this helped limit the dip in the euro after the resignation of Dominique Strauss-Kahn, the French finance minister.

Outlook, page 19