The Bank of England's surprise interest rate rise yesterday has led to a rise in the pound.

The pound was up against the euro and dollar at $1.88685 and €1.47520, as the bank's monetary policy committee (MPC) put interest rates up 0.25 per cent to 4.75 per cent.

Vicky Redwood, UK economist at Capital Economics, explained the MPC had opted to increase interest rates to hold inflation.

She said: "They were probably concerned that with headline inflation picking up there was an increased risk of second round effects, increased wage demands and higher inflation expectations, a rate rise would hopefully keep those in check.

"There also seems to be not much spare capacity in the economy at the moment and with growth moving above trend then we might have seen inflationary pressures."

The European Central Bank also, as expected, raised interest rates to three per cent but the gains by the euro came as bank president Jean-Claude Trichet suggested that further interest raises could be on the cards in the autumn.

The US federal reserve will make its decision on interest rates next week and recent good employment figures suggest it will continue its campaign of raising rates, which in turn should support the dollar.