The pound got a fillip as UK interest rate expectations took a knock after an unexpected surge in raw material costs for producers. The pound rose convincingly above the 1.78 usd level while the euro edged down a little closer to the 0.69 stg mark. In data out this morning it was revealed that surging oil prices, as well as higher costs of imported equipment, caused raw material costs to increase by their highest annual rate in more than 20 years in the year to July, official figures showed today. Additionally, there was also evidence that manufacturers have been able to pass on some of these cost increases into their prices, which could raise concerns at the Bank of England about rising inflationary pressures. "With oil prices rising to new nominal highs in early August, this evidence of an increase in underlying inflationary pressures will reinforce belief that the Bank of England is unlikely to cut interest rates again in the near future at least," said Howard Archer at Global Insight. Players reacted to the news by pushing the pound higher as they were forced to adjust rate cut expectations slightly. Last week, the Bank of England delivered its first rate cut in two years due largely to a slowdown in consumer spending, taking the base rate to 4.50 pct from 4.75 pct. Many have been expecting another quarter point cut before the year is out. These predictions have now taken a knock but not entirely diminished. Investec economist David Page pointed out that the central bank is more concerned about the medium-term outlook for inflation and will not be too perturbed by short-term fluctuations. "The Bank of England knows and expects that inflation will be relatively firm in the short term on the back of higher energy prices, but the Bank of England is very much focused on the medium term," he said. As such it will take more strong numbers, particularly from the consumer side, to really end talk of more rate cuts. Against this backdrop, the pound is unlikely to rise too far. The pound's gains were more apparent against the dollar which has been struggling despite robust US data and the near certainty that the Fed will lift the cost of borrowing by a quarter point to 3.50 pct tomorrow. Analysts believe both the hike and sturdy data have been factored into the dollar's exchange rate. Indeed, even a bigger than expected rise in US job creation, released Friday -- with non-farm payrolls rose by 207,000 in July -- failed to spark any dollar rally. "When economic data with the clout of the monthly employment report fails to support the currency, it is a potentially important event, suggesting a shift away from relative growth and interest rate differentials that had been a key support for the dollar in the second quarter," said Mark Austin at HSBC. Against this backdrop, concerns over the structural problems facing the dollar have come to the fore again, making the US trade data, due Friday, to take on added importance.