Sterling climbed against the dollar and the euro yesterday as the likelihood of a UK rate rise in November increased with higher-than-expected inflation data.

This morning sterling was worth $1.8752, €1.4773 and 220.8400 yen, with the pound rebounding from Monday's multi-week low.

The Consumer Price Index rose 0.4 per cent to 2.5 per cent in August, beating expectations of 2.4 per cent and equalling the highest rate since Labour came to power nine years ago.

Driven by large rises in gas and food prices, the unexpectedly high data raises the likelihood that the Bank of England (BoE) will have to hike interest rates before the end of the year.

Jonathan Loynes, chief European economist at Capital Economics, said: "Looking ahead, inflation is set to rise further over the coming few months in response to the latest round of gas and electricity price hikes and the rise in university tuition fees.

"Nonetheless, we remain confident that inflation will fall back sharply next year as energy effects finally fade and core inflation remains pretty subdued."

He added: "Overall, the figures leave the case for a further rise in interest rates very finely balanced. Much will hang on the forthcoming news on activity, with Thursday's figures on retail sales the next key indicator of the strength of the economy."

The BoE unexpectedly raised rates a quarter point to 4.75 per cent in August