HOPES of further cuts in interest rates have been dealt a blow by the rising cost of raw materials - the biggest hike for 20 years.

Input prices rose by 13.5 per cent in the year to July - the highest seen by manufacturers since February 1985, said the Office for National Statistics (ONS).

In the past, manufacturers had managed to avoid passing on these rising costs to wholesalers, retailers and ultimately shoppers.

But latest ONS figures showed that output - or factory gate - prices rose by 0.7 per cent between June and July, compared with a fall of 0.1 per cent between May and June.

The year-on-year increase of 3.0 per cent was much stronger than the 2.5 per cent expected in the City and raised fears about the impact on UK inflation - a factor that may force the Bank of England to curb any plans for further interest rate cuts.

Centre for Economics & Business Research economist Thushani Gajasinghe said: "With this pressure on inflation, the Bank of England is likely to keep the interest rate at its current level until at least November."

Inflation is currently at 2.0 per cent but the Bank expects that figure to increase because of the impact of higher oil prices.

On August 10 the Bank will provide further details when it delivers its quarterly inflation report.

Analysts will pore through that data after last Thurs-day's 0.25 per cent cut in the base rate to 4.5 per cent.

More news is expected on August 17, when the minutes of last week's rate-cutting meeting are published.