Pound rises to one-year high

The pound rose to its highest level in a year against the dollar in anticipation of higher UK interest rates this year after a surge in raw material costs for manufacturers.

The cost of raw materials increased by 2.5% last month - the fastest rate since July last year - fuelled by a 10.6% surge in crude oil prices, the Office for National Statistics reported.

Output prices, known also as factory gate prices (prices at which goods are sold), however, slowed slightly to an annual rate of 2.4%. But that was only because duty changes in Gordon Brown's 2006 budget had a smaller upward impact than a year earlier.

Core output prices, which exclude food, drink, tobacco and petrol and are not affected by changes in excise duty, rose at a rate of 2.2% in the year to April - the fastest level for nine months.

"The Bank of England will be far from happy with the producer price inflation report for April, and it will reinforce the Bank's concerns that high energy and commodity prices will increasingly work their way through the supply chain over the coming months," said Howard Archer of Global Insight.

Increasingly, analysts believe that the Bank of England's next move will be up. Credit Suisse last week said it expected borrowing costs to go up to 4.75% at the end of this year and 5.25% at the end of next year.

"The global economy is growing very strongly," Credit Suisse said. "It is starting to have a bigger impact on the UK."

The Bank's monetary policy committee last week left interest rates at 4.5% for the ninth month running.

On an annual basis, the ONS said input prices - prices of materials and fuels for manufacturers - rose by 15.7%. Crude oil prices were the biggest upward factor, completely outweighing a sharp fall in gas prices as they came off recent record highs.

Against the dollar, the pound was at $1.8677 in late morning trading in London from $1.8601 last Friday, after touching $1.8690, the highest since May 12 2005.

Analysts will be looking for clues in the Bank of England's latest inflation report, to be released on Wednesday, as to whether the Bank is leading towards higher borrowing costs for this year.