Sterling is likely to remain stronger for longer than expected following the Bank of England's surprise quarter-point interest rate increase.

British interest rates are now double those in the euro zone but at the same level as their US equivalents. And the latest rise underlines the possibility of Britain postponing a decision to join the single currency.

The decision to raise rates, following seven consecutive cuts, also emphasises the turnaround in the global economy, with the Bank of England now following the US Federal Reserve in moving rates upwards and the European Central Bank likely to fall into line by doing likewise early next year.

According to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, the decision to raise rates to 5.25 per cent underscores the fact that there are more reasons to buy sterling than to sell.

Pressure on the pound against sterling is being maintained by the recovery in the British economy and the absence of any sign of political or fiscal instability there.

It now appears likely that the pound will end the year at around current levels of 84p against sterling, according to Mr Hunt and Mr Jim Power, chief economist at Bank of Ireland. This is very good news for exporters and boosts their competitive position in the UK market but it is not so positive for prices - and inflation.

The rate move also underlines the political difficulties facing New Labour in attempting to persuade others to back the euro. According to Mr Power, the earliest Britain can join the single currency is 2004, with the result that this State will have to endure a few more years of currency fluctuations.

It also demonstrates how independent the Bank of England has become.

British politicians have been very cautious since the European election results earlier in the summer. But there were still those who hoped the Bank of England had a place in the euro in its sights. Yesterday's move, however, was certainly driven by domestic considerations and cannot be seen as an attempt to converge rates. Mr Power says the key driver was rising house prices and indicates the paranoia still prevailing following the experience in the late 1980s.

The Bank of England's monetary policy committee (MPC) itself cited world demand, the strength of consumption, the housing market and continuing tight conditions in the labour market as reasons for the rise.

It also said an early move could lower the level at which interest rates might otherwise need to be set.

A full explanation of the MPC's thinking will be given in minutes of this week's meeting which will be published on September 22nd.

According to Mr Hunt, British rates will peak at 6.5 per cent and euro rates at 4.5 per cent. For Britain to join the euro at that time, rates would have to converge and this would be a large difference to negotiate given the vulnerability of the UK economy to short-term rates. It could even risk returning the UK economy to a boom-and-bust cycle which it has just managed to leave behind.

The rate rise is also likely to affect stock markets. Traditionally, rising interest rates signal uncertainty in equity markets and, according to Mr Power, the rise is likely to signal a move sideways for a while.

Others are more bullish, however. Mr Hunt believes the markets will take the view that the Bank of England is being pre-emptive and is behaving like a prudent monetary authority.

"This rate rise and the 1 per cent to come over next year will allow the economy to enjoy a good performance and will reduce inflationary pressure," he said. "That should be good for equities and the markets will have recovered from this shock in a couple of days."