The pound soared yesterday to its highest level for 14 years, coming within a whisker of the $2 mark, as currency traders bet that British interest rates will be ratcheted higher.

Sterling was pushed one and a half cents higher to a peak of $1.9917, amid expectation of tighter UK monetary policy to crack down on fresh signs of inflation. The hot money that sloshes around capital markets in search of short-term returns scents more rises in interest in the wake of the quarter-point rise to 5.25 per cent this month.

Minutes from the Bank of England Monetary Policy Committee’s last meeting, at which it raised interest rates, are due out today and there was speculation that they may have a hawkish tone.

Fresh data on economic growth could also be seen as reinforcing the case for higher interest rates. Gross domestic product data is expected to confirm that Britain grew at an above-trend pace in the final quarter of last year.

The spike in the pound came before a speech last night by Mervyn King, Governor of the Bank, in which he told companies and employees in blunt terms to curb pay and price rises.

Currency analysts said that there was nothing to stop the pound breaking through $2, a high last reached momentarily in June 1992 when sterling was artificially boosted by its peg to continental currencies in the European exchange-rate mechanism before its Black Wednesday crash.

Ian Stannard, currency strategist for BNP Paribas, said: I think we are going to see sterling breaking the $2 level as early as the next couple of weeks.”

David Page, an economist with Investec, said he would not be surprised by a $2 pound. “It would be quite an historical moment,” he said. “Sterling has not reached that level since one day in 1992 and then not since the start of the 1980s.”

With industrialists raising their wholesale prices at the fastest rate for ten years, according to a CBI survey yesterday, the case for tighter monetary policy appears to be hardening.

Ian McCafferty, the CBI economist, said that manufacturers expected to raise prices in the next three months in further evidence of short-term inflationary pressures. “This has been a surprisingly upbeat quarter for manufacturers, who have seen some return of their pricing power,” he said.

Derivatives dealers are already pricing in two more quarter-point rises in UK base rates, with the first expected as early as next month.

Speculative currency investors are fleeing the US amid concern that the Federal Reserve may cut America’s interest rates to boost its economy.

Stronger sterling makes life harder for exporters and the UK tourist industry because their goods and services become more expensive to foreigners. However, it makes imports and foreign travel cheaper for Britons. The Bank is thought to be relatively unconcerned about a dearer pound because it helps to keep a lid on inflation.

Sterling also reached a 14-year high against the Japanese currency of 241 yen and was also rising against the euro, trading at 65.36p to the euro. The euro itself was strong, reaching a record against the yen on expectation of higher interest rates in the eurozone.

The pound is also at its highest against a trade-weighted basket of foreign currencies. Last night, it retreated a little, trading at $1.9825 in New York.

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