The pound powered to new 26-year highs against the dollar yesterday, reaching levels above $2.015 as currency markets bet that a new rise in British interest rates this week is close to being a “done deal”.

Sterling’s latest surge against the greenback came as City economists said that another quarter-point increase in base rates on Thursday remained odds-on, despite new evidence that four increases since last August are starting to sap consumer demand.

Output across the retailing and wholesaling sector tumbled by 1.6 per cent in April, in the sharpest plunge in almost 3½ years, official data showed.

The abrupt decline, 40 per cent of which was blamed on lower car sales, meant that the output of the services sector as a whole succumbed to a 0.1 per cent decline in April – the first such fall since January. Output in the hotels and restaurants sector was estimated to have dropped by 1.7 per cent in April.

BACKGROUND

• Fears of retail bloodbath as interest rates hit home

• Fall in mortgage applications as interest rate rises bite

• Inter-bank rates climb to nine-year high

• Emergency injection

• The 3Rs: reading, writing and interest rates

Fight back against rising interest rates

Mark Bridge suggests some easy ways to boost income and offset climbing mortgage repayments

• How landlords can boost their profit

• Make £1m tax-free in just 10 years

Related Internet Links

• The Times Shadow MPC

• The Bank of England MPC

The gloomy figures were the latest to suggest that higher rates are starting to bite, but economists said that they were unlikely to forestall the expected rise in interest rates this week.

Analysts pointed to other indications in yesterday’s data of continued robust conditions across much of the economy – as well as in Europe and Japan – along with persistent price pressures that will do little to ease the inflation anxieties of hawks on the Bank of England’s Monetary Policy Committee.

The more upbeat figures showed that services sector output in the three months to the end of April accelerated to register buoyant growth of 1 per cent, up from 0.9 per cent in the three months to March, and in spite of the deterioration in April alone.

Manufacturing’s recovery also remained robust last month, helping to keep cost and price pressures simmering, a CIPS/RBS purchasing managers’ survey suggested.

A dip in new orders pushed the CIPS headline index of industry’s activity down a notch, to 54.3 for June, from May’s reading of 54.7. Any figure above 50 indicates expansion. But the survey’s gauge of manufacturers’ input costs climbed to its highest since last September, while the reported price of goods leaving factories remained close to May’s record high.

The MPC’s hawks may also seize on official figures showing that unit wage costs jumped by 2.4 per cent in the first quarter, the sharpest increase since last spring. More reassuringly, productivity improved sharply in the first quarter. Measured by output per worker, productivity grew by 2.7 per cent in the three months to March, the best since early 2004.

The pound’s latest leap against the dollar will come as welcome news for Britons planning holidays in the United States and other dollar-linked destinations. Consumers at home will benefit to some extent from cheaper imports, but sterling’s strength will be a blow to exporters, as well as British retailers and the tourist trade, which may face a loss of American visitors.

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