The possibility of sterling hitting $2 this week loomed over the City this morning as rising producer prices and a booming property market strengthened the chances of a May interest rate rise.

The pound rose above the $1.99 mark, reaching $1.9930 by 11am, the highest level since shortly before Britain was forced out of the Exchange Rate Mechanism in September 1992.

The surge followed the publication of the producer price index for March from the Office for National Statistics. It showed that factory’s output prices rose at their strongest annual rate since August, pushed up by higher than expected petrol prices and scrap metal costs.

Core output price inflation, which strips out changes in volatile food, drink, petrol and tobacco costs, rose to a nine-month high of 2.9 per cent.

Companies’ raw material costs rose by 1.2 per cent, taking the annual rate of input price inflation to 0.7 per cent compared with a 0.9 per cent fall in February.

Paul Dales, of Capital Economics, said: “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.”

He and other City analysts said that it was now very likely the Bank of England would raise interest rates at the start of next month, for the fourth time since August.

Peter Newland, of Lehman Brothers, said that there was now a risk that his forecast of 2.9 per cent inflation on tomorrow’s consumer price index could prove too low.

A repeat of December’s 3 per cent figure in tomorrow’s inflation data would make higher rates a certainty, while any figure above that would trigger an explanatory letter from the Bank.

Retail prices inflation is also likely to be bolstered by rising house prices. Figures from the Department of Communities and Local Government released this morning show that property prices climbed by 12.1 per cent in the year to February, up from 10.9 per cent in January and higher than expected.

The news follows a shock release from Rightmove, the property website, this morning that asking prices for houses rose by 3.6 per cent in April alone, the fastest such pace for five years. Rightmove said prices were up by 15 per cent year on year, similar to their strength at the time of the last housing boom despite interest rates now being much higher.

Daragh Maher, senior currency strategist at Calyon, said: “For a while the market has seemed pretty determined to get a $2-handle on cable. We’ve had a run of pretty good data from the UK — the PPI this morning, the Rightmove and just generalised negative dollar sentiment.

“It (a $2 pound) could happen today.”

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