The Bank of England says it's likely to raise interest rates in the coming months if the economy and price pressures keep growing, giving its clearest signal to date that Britain's first rate hike in a decade is approaching.
In a week when data showed British prices rising faster and unemployment falling to a four-decade low, the central bank said on Thursday its tolerance for above-target inflation was lessening even if the country's departure from the European Union remained a risk.
Policymakers voted 7-2 on Thursday to keep rates on hold at a record-low 0.25 percent, as expected.
But the new guidance from the BoE pushed sterling to a one-year high against the US dollar. Investors priced in a more than 50 percent chance of a rate hike before the year's end.
The BoE's policymakers said the economy now looked closer to running at full capacity as employment rose and wages picked up, boosting inflation pressures.
If this continued, "some withdrawal of monetary stimulus was likely to be appropriate over the coming months", it said.
Some economists said they still thought the BoE was in no hurry to raise borrowing costs, given the doubts about what leaving the European Union in 2019 means for Britain's economy which has weakened this year.
The Brexit vote has put the BoE in a dilemma. On the one hand, it wants to support the economy through the shock of leaving the European Union, leaving it behind other central banks on the tightening path such as the US Federal Reserve.
But at the same time, it needs to keep a grip on Britain's fast-rising inflation which rose sharply after the Brexit vote weakened the pound.
The BoE has previously suggested a rate hike was nearing only to be caught out by surprises in the economy, earning Carney the epithet of "unreliable boyfriend" from a politician.
Indeed, the BoE said on Thursday there were "considerable risks" to the outlook, including the reaction of households, businesses and markets to Britain's EU divorce
Most economists had been expecting a first rate hike by the BoE only in 2019, according to a Reuters poll last month.
Reuters
