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British pound breaks through USD2 after inflation readings

The British pound broke through the US$2 mark on Tuesday for the first time in nearly 15 years after new data showed an unexpected surge in inflation, prompting speculation of interest rate increases.

The pound was at its highest level since "Black Wednesday" in September 1992, when Britain crashed out of the European Exchange Rate Mechanism.

After initially retreating back below the psychological US$2 mark, the currency spiked again to US$2.0071 as the U.S. dollar retreated following the release of U.S. inflation data showing the core prices rose less than expected last month.

In afternoon European trading, the pound was at US$2.0064 - up from US$1.9900 late Monday in New York.

"We believe that sterling could well remain above US$2 for an extended period," said Howard Archer, chief economist at Global Insight.

The government's Office for National Statistics revealed Tuesday that consumer price inflation accelerated to 3.1 percent in March, up from 2.8 percent in February.

The headline rate of retail price inflation, which includes mortgage interest payments, rose to 4.8 percent from 4.6 percent.

It now costs 1.99 pounds (US$3.99) to buy a Big Mac, an average 2.56 pounds (US$5.14) for a pint of lager and 85 pence (US$1.71; EUR1.26) for a loaf of sliced white bread.

The rising CPI rate, well above the Bank of England's target of 2 percent, adds pressure for a further rise in official interest rates, which are currently at 5.25 percent.

The bank has raised the base rate by three-quarters of a point since August and economists had been predicting one more rise in the coming months to close off the current cycle of increases - but the data has prompted speculation about more than one hike.

In a letter triggered by the soaring inflation rate, Bank of England Governor Mervyn King said that policymakers "must ensure" price expectations will be "anchored."

"The Monetary policy Committee remains determined to set interest rates at the level required to bring inflation back to the 2 percent target," King said in an open letter of explanation to Treasury Chief Gordon Brown, which is required if the inflation rate runs more than 1 percent above or 2 percent below the target. It is the first time King has written such a letter.

Investec Securities chief economist Philip Shaw said the inflation figures made an interest rate increase "a certainty, along with the possibility of another rate rise beyond that."

However, he added that the bank was unlikely to have a "knee-jerk" reaction and raise rates at their May meeting, which is just two weeks away.

Jonathan Said, senior economist at the Centre for Economics and Business Research, said the data "opens the possibility of rates rising beyond 5.5 percent after May towards the 6 percent level."

King said the rise in inflation partly reflected an "unexpectedly sharp" increase in domestic energy prices during the second half of last year and a rise in food prices caused by a weather-induced global reduction in supply. Inflation was also supported by increased spending and business confidence, he said.

The pound reached its highest levels since before Britain was forced to leave the system that pegged the pound to the currencies of other EU members after currency speculators drove it out of its allowed range.

Then-Prime Minister John Major raised interest rates twice on Sept. 16, 1992, and authorized the spending of billions of pounds in a doomed attempt to stop the currency from crashing out of the exchange rate mechanism, on a day the current Treasury Chief Gordon Brown described as "Black Wednesday."