Sterling moved higher on currency markets after "headline" inflation figures reached 3.7 per cent, the highest levels since 1995, prompting economists to predict further increases in British interest rates over coming months. Sterling rose 2.66 pfennigs to 2.9190 deutschmarks and 1.12 cents to $1.7050 while its "trade-weighted" basket index firmed 1.1 to 103.8.

However, traders in Dublin said the market was reluctant to let the pound rise much above DM2.60.

Irish corporates took advantage of the almost five-month high against the dollar to sell, according to Mr Kevin Daly, economist at Ulster Bank.

As a result, the pound closed at 89.25p against sterling in late trading from 89.97p and at DM2.6055 from DM2.5978.

Mr Jim Power, chief economist at Bank of Ireland, said investors continued to flood into sterling as the south-east Asian currency crisis continues - the South Korean yuan now under pressure.

The US on the other hand, according to Mr Power, has closer ties both economically and politically with the region and thus the dollar is suffering.

Of course, strong inflation data, which is said to justify last week's rate rise in Britain and speculation that there is more to come, was also underpinning the currency, he said.

In London, share prices slipped with the FTSE 100 index closing 13.1 lower at 4,793.7. Renewed upward pressure on sterling came shortly after figures showing an increase in the Retail Price Index annual inflation rate from 3.6 to 3.7 per cent last month. The underlying rate of inflation, excluding mortgage interest rates, rose from 2.7 to 2.8 per cent, outside the government's medium-term inflation target of 2.5 per cent.

Both increases surprised City economists who had been forecasting unchanged or lower inflation due to recent figures suggesting the economy was beginning to respond to the tightening of monetary policy since April. By the same token, the further up-tick in inflation provided support for the Bank of England's decision last week to lift British "base rates" by 0.25 to 7.25 per cent.

Abbey National yesterday became the first bank to increase its mortgage rate by 0.25 per cent in response to the Bank of England's move. Nationwide said it would not change its mortgage rate until the New Year.

Ahead, though, more interest rate increases may still be needed to head off the threat of accelerating inflation posed by continuing growth in economic activity. The futures market raised its implied forecast of interest rates next June from 7.73 to 7.8 per cent. Some economists believe the Bank of England could be forced into making even larger increases. Goldman Sachs economist, Mr Gavyn Davies, speaking at the Confederation of British Industry Conference, said the economy was sill growing at "breakneck speed" and warned that interest rates may have to be increased to 7.75 or even 8 per cent by next spring.

However, CBI economist, Ms Kate Baker said rates of between 7 and 7.5 per cent would be enough to meet the government's medium-term inflation target.