The pound reached a 14-month high this morning, after data revealed UK inflation soared to 4.4% in February.
Sterling rose 0.2% against the dollar after the Office for National Statistics revealed CPI for February was more than double the Bank of England's 2% inflation target and up 0.4% from January's figure.
Public sector net borrowing was also a record at £11.7bn for February.
Following the news, the pound was trading at $1.6359 at 09:42 in London, rising 0.3% on the day, while 10-year gilts saw yields rise 8 basis points to 3.61%, according to Bloomberg.
Nick Ryder, global currency analyst from Smart Currency Exchange, says: "CPI inflation has hit the highest level since October 2008, and has seen sterling hit a new 14 month high of $1.64/£1. Higher than expected inflation has renewed calls for an interest rate hike, with markets pricing in a hike by the Bank of England as early as May."
Hetal Mehta, an economist at Daiwa Capital Markets Europe, adds: "Inflation is only headed one way in the coming months and we see it getting very close to 5%.
"There is so much uncertainty, not least because of the quake in Japan, the bank will want to wait. It is a close call, but May would be a bit early for a rate increase."
In January, the rise in CPI was largely attributed to the VAT hike and the rising price of oil, with Brent Crude still high at $114.67 dollars a barrel.
The statistics office says the gain in inflation in February was spurred by the rising cost of housing services, water, electricity, gas and fuels, up 3.1% as well as increasing clothing prices, which rose 2.8% in February.
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