"CLARKE is today's hero" was one response in London news of the surprise interest rate increase. But the British Chancellor of the Exchequer's decision will have led to a different reaction at the Central Bank, which has been grappling with the problems caused by a rising sterling for some weeks now.

The most immediate implication of the interest rate rise is to underpin sterling. The pound fell close to parity and the Central Bank is believed to have stepped into the market to stem its decline. There is no doubt but that the Central Bank would favour a stronger rate for the pound against sterling. A strong pound acts as a guarantee against inflation by holding down import prices, although the Bank may hope that the fall against sterling may be offset by a rise against currencies such as the deutschmark.

The pound's trade weighted index the average of its value against the currencies of our trading partners remains well above last year's level. But the Central Bank will want it to stay that way, particularly with next year's inflation rate counting for qualification for the single currency. So a further early reduction in short term interest rates here now looks most unlikely.

All in all, it has been a difficult few weeks for the Bank. First it started selling pounds. apparently to try to head off a revaluation of the green pound - cutting EU payments to farmers - which would be triggered if the currency rose too sharply in the EMS.

But then sterling started to rise, pulling the pound up with it. This made the Bank's efforts to hold it down against the other EU currencies all the more difficult, while introducing an unwelcome element of weakness against the currency of our main trading partner.

Add in the rule in the Maastricht Treaty that a currency must have traded stably within the ERM before a currency will be allowed join monetary union and goodness knows how this will be interpreted and the problems facing the Central Bank in managing the currency become clear.

Then, just as sterling appeared to be topping out, yesterday's move by the chancellor has given it renewed momentum.

Whether sterling will rise further is unclear. Mr Chris Johns, analyst at ABX/Amro Hoare Govett in London, said that the rise should underpin the currency by adding to the credibility of British economy policy. Mr Clarke appeared to have agreed to it to head off criticism from the Bank of England and to leave a clear run to the next election, including a tax cutting budget, he said.

Many forecasters predicted yesterday that significant rises in the value of the British currency were now on the way. This could be the case, and a fall of the pound well below parity would certainly not be welcomed by the Central Bank. But currency forecasting is a hazardous exercise and the long term reaction to yesterday's move remains to be seen.

For the moment everything is in sterling's favour rising interest rates; the enhanced credibility of Government policy; and the prospect of sweetness and light between Eddie George and Kenneth Clarke in the coming months. The outlook for the British economy also looks reasonably bright, with growth of over 3 per cent anticipated next year.

But with a budget and an election approaching, the mood of investors' towards the currency could turn on a sixpence, as has so often been the case in the past. For the moment, the markets are likely to respond positively to Mr Clarke's move, believing it shows a prudence which had not been expected in the run up to an election. The Central Bank will hope that the resulting boost to sterling is not too dramatic.