Pound reaches a five-year high as Wall St rebounds

The pound touched its highest level for five years yesterday, driven by the firm expectation that the Bank of England will increase interest rates soon after next week's Budget.

Sterling's exchange rate ended unchanged at just over DM2.87, having climbed above DM2.88 during the day.

Separately, shares bounced higher on both sides of the Atlantic, with an ebullient Wall Street rebounding 153.8 points to shrug off most of Monday's dramatic 192-point plunge.

The Dow Jones Industrial Average closed at 7,758.06 on what analysts described as heavy buying of pharmaceutical firms by investors optimistic that a wave of new drugs is about to be launched. The FTSE 100 index ended nearly 21 points up at 4,596.3, ending a six-day losing streak.

Some analysts were predicting that the pound might reach DM3 before long. James Barty, UK economist at Deutsche Morgan Grenfell, said: "Everybody is very gung-ho about the prospect for a base rate increase."

Interest rates could rise by half a point as early as the week after the Budget, when the Bank's monetary policy committee next meets, he said.

Yesterday brought a fresh plea to Gordon Brown, Chancellor of the Exchequer, to raise taxes next week, and take some of the pressure off interest rates. The Item Club, which forecasts the economy for accountancy firm Ernst & Young, said a tough Budget was necessary to prevent spending spiralling out of control.

Item Club economist John Gaster said: "If consumer spending is running away in the autumn, drastic interest rate increases will be needed."

Other pre-Budget lobbying came from the Royal Institution of Chartered Surveyors, but in this case against possible Budget tax increases. In its latest survey of estate agents it said house prices climbed in the three months to May due to the shortage of property for sale.

According to spokesman Ian Perry: "We expect to see more sellers taking the plunge once the Budget is behind us." But an increase in stamp duty or the abolition of mortgage interest tax relief (Miras) in the Budget would dent the housing market.

An independent expert, Professor David Miles of Imperial College, agreed. "The impact of something like doubling stamp duty would be quite big."

The two alternatives would hit different groups. Abolishing Miras would hurt owners of cheaper homes - mainly in the North - proportionately more, whereas higher stamp duty would hit harder in the South where house prices are higher.

Across the Atlantic, there was new evidence of the US economy's impressive performance with consumer confidence jumping to the highest level since 1969.

Yet investors' fears of both a Japanese sell-off and a Federal Reserve move to raise interest rates receded. Christopher Low, an analyst at HSBC Markets in New York, said subdued inflation meant the Fed was unlikely to have to lift the cost of borrowing before the autumn.

"It's almost too good to be true, but then it has been like this for several years," he said.