The pound got as close as it has in nearly 15 years to the symbolic $2 mark, as expectations of another rise in UK interest rates were fuelled by rising factory gate and house price inflation.

The pound got as close as it has in nearly 15 years to the symbolic $2 mark, as expectations of another rise in UK interest rates were fuelled by rising factory gate and house price inflation.

Sterling burst through $1.99 yesterday morning to notch up an intra-day peak of $1.9939 - its highest level since the days leading up to the pound's exit from the European Exchange Rate mechanism in September 1992. Yesterday's trading high was more than one cent greater than sterling's close in London on Friday of $1.9829.

The pound eased later yesterday and was last night trading around $1.99.

Sterling went through $2 on September 8, 1992, in the run-up to the pound's ERM exit on "Black Wednesday" (September 16), but then turned tail quickly.

Ian McCafferty, the Confederation of British Industry's chief economic adviser, highlighted both positive and negative influences of a strong pound. He said: "The rise in sterling is a two-edged sword. Metals, oil and many other commodities are priced in dollars and will become relatively cheaper for UK businesses, which should have a beneficial effect on inflation. It will however put pressure on exporters, though businesses have lived with a strong pound for the past few years, and remain highly competitive."

National Statistics said yesterday that UK factory gate prices in March were up 2.7% on the same month last year. This marked an unexpected acceleration from upwardly-revised annual growth of 2.3% in these output prices in February. The City had predicted annual output price inflation of only 2.2% for last month.

Factory gate prices rose 0.6% month-on-month in March - double the City forecast.

Excluding the more volatile components of food, drink, tobacco and petroleum, annual core factory gate price inflation accelerated from 2.7% in February to 2.9% in March with a month-on-month rise of 0.4%. This annual rate also exceeded the City forecast, of 2.7%. Unlike the headline factory gate price reading, this core measure is adjusted for seasonal factors.

These signs of pipeline inflationary pressures will give hawks on the Bank of England's Monetary Policy Committee another strong argument should they wish to push for one more rise in the cost of borrowing at next month's rate-setting meeting.

With consumers remaining in fine fettle, the fact that the UK housing market is well and truly back in red-hot form is unlikely to have escaped the notice of MPC hawks either.

Annual UK house price inflation jumped from 10.9% in January to 12.1% in February, according to figures published yesterday by the Department for Communities and Local Government.

Howard Archer, economist at Global Insight, highlighted the leap in this measure of annual house price inflation from a low point of 3.3% in March last year.

While these government data lag surveys from the likes of mortgage lenders Halifax and Nationwide, they represent further evidence that recent interest rate rises have so far had little if any effect on continuing housing market exuberance.

Annual house price inflation in London accelerated from 13.2% in January to 16.7% in February, according to the government numbers.

The MPC has raised base rates three times this cycle, taking them to 5.25% with quarter-point rises last August and November and this January.

Minutes of the MPC's April 4 and 5 meeting, at which base rates were held for a third successive month, will be published tomorrow.

David Owen, economist at securities house Dresdner Kleinwort, said the minutes "could well reveal a three-way split on the MPC".

David Blanchflower, MPC arch-dove, voted for an immediate quarter-point cut in March amid a stock market sell-off which has been more than reversed since. Economists see a distinct possibility that some of the other eight MPC members would have pushed unsuccessfully for a rate rise this month.

Paul Dales, at Capital Economics, said yesterday: "The stronger-than-expected tone of March's producer prices data will further boost fears that the strength of demand is enabling manufacturers to push through large price increases. As this now appears to be the MPC's main concern, (the) data further support the case for a May interest-rate hike."

Dales noted the 0.4% monthly increase in core output prices was the seventh rise in a row. He also highlighted the 0.6% jump in overall factory gate prices during March.

He said: "This pushed the headline measure of output price inflation up from 2.3% in February to 2.7% and the core measure up from 2.7% to 2.9% - both well above levels consistent with the MPC's 2% CPI (consumer prices index) inflation target in the long run. What's more, the most reliable survey measure of prices - the CBI monthly trends survey - is consistent with further rises in core output price inflation to around 3.5% "Of course, there is no mechanical relationship between movements in producer output price inflation and CPI inflation. But a widening in manufacturers' (profit) margins - as suggested by the fact that manufacturers' total costs are rising at a much slower rate than their selling prices - would be expected to put upward pressure on high street prices in the medium term."

UK producers' input prices, comprising raw materials and fuels, also showed a greater-than-expected annual rise last month but this was nevertheless anaemic relative to the jump in output prices.

The City had forecast seasonally-adjusted input prices in March would be up just 0.2% on the same month last year, but annual growth came in at 0.7% in the National Statistics release. In February, input prices had been down 0.9% on the same month last year.

Excluding food, drink, tobacco, and petroleum, annual input price inflation accelerated from 1.4% in February to 2.4% last month.

Dales said: "Overall, then, (the producer price) figures support expectations that interest rates will need to rise further in order to keep medium-term price pressures well contained.

"We think that one more hike will do the job, although the possibility that interest rates will eventually rise further than 5.5% has increased in recent weeks."