Soaring oil and import prices pushed up British manufacturers' costs at their sharpest pace in four and the half years in January, boosting expectations that interest rates may rise again this year.

But Bank of England policymakers may be relieved that companies are not passing on their rising costs in full as inflation at the factory gate hit its lowest level in half a year.

"Underlying cost pressures continue to rise. The question over the forthcoming months is whether this causes a squeeze on retailers margins or helps push inflation up," said John Butler, economist at HSBC.

The Office for National Statistics said yesterday producer input prices rose a seasonally adjusted 3.4 per cent last month, more than twice the rate predicted. Annual output price inflation, however, slowed to 2.6 per cent from 2.9 per cent.

Government bonds and interest rate futures fell after the data as dealers priced in the possibility of a further rise in official interest rates.

"Many in the market believe that there is definitely room for another rate hike," said Marc Ostwald, a strategist at Monument Securities.

The central bank has hiked rates five times between November 2003 and August 2004 but left them on hold at 4.75 per cent at last week's meeting.

Analysts are now awaiting the BoE's February Inflation Report due tomorrow. It is expected to take a more hawkish tone than in November following a stream of strong data, including upbeat house price surveys and robust growth figures.

Economists said there were signs in the PPI data that cold snaps in southern Europe had raised imported food prices and that could put upward pressure on the CPI data due today.

The ONS said the chief reason for the surge in input prices was a sharp increase in the cost of crude oil. This shot up 14.8 per cent in January, the biggest jump since August, leaving it 40.9 per cent higher on the year.

But even allowing for the oil effect, core input prices rose sharply, by 1.9 per cent in January - the largest monthly rise in 10 years - as the cost of imported materials marked its biggest jump since comparable records began in January 1991.

"Policymakers will remain concerned that higher import prices could keep core pressures robust going forward," said Alan Castle, economist at Lehman Brothers.

The producer prices data largely overshadowed new housing market data also out yesterday. The Office of the Deputy Prime Minister said that house prices rose at 10.7 per cent in December, their slowest annual pace in 15 months.