The Bank of England said it was 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 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 U.S. 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.
"I would describe (a rate hike in) November as being live," Nomura economist George Buckley said.
Other 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.
"We see this as an attempt to shake markets out of their complacency after the failure of previous, subtler, attempts," Andrew Goodwin, an economist at Oxford Economics, said.BREXIT DILEMMA
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 U.S. 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.
Next week Prime Minister Theresa May is due to give a speech on Brexit before her Conservative Party holds a conference in October. May will also attend an EU summit next month.
Economists at Citi were wary of betting on a rate hike at the BoE`s next policy meeting in November.
"If these events pass without significant effect on economic confidence, if inflation exceeds 3 percent in October and if the labour market continues to tighten, a 25 basis-point Bank Rate hike could become a reality for November," they said.BETTER THAN EXPECTED?
Most economists had been expecting a first rate hike by the BoE only in 2019, according to a Reuters poll last month.
The central bank said on Thursday that the economy had done a bit better than expected since its policymakers met in August, but it was unclear how sustained any increase in growth might be.
Inflation was likely to rise further above its 2 percent target and exceed 3 percent in October, slightly more than previous forecasts, after reaching 2.9 percent last month.
Most economists judge that wage growth is still weak at 2.1 percent year-on-year in July. But the BoE said this was better than it had hoped for and that over a shorter timeframe, pay was rising at an annualised rate of 3 percent. Statistical effects might also be making pay look too low, it added.
The BoE also said there were signs consumer demand might now be picking up after inflation hurt spending earlier this year.
It repeated its warning that Britain could no longer grow as fast as it had in the past without causing excessive inflation.
Two policymakers, Ian McCafferty and Michael Saunders, voted to raise rates to 0.5 percent to reverse the emergency cut made in August 2016 shortly after the Brexit vote.
Some analysts had expected BoE Chief Economist Andy Haldane to join the dissenters. Gertjan Vlieghe, who was the first MPC member to vote for a rate cut after the Brexit vote, is due to speak on Friday while Carney will make a speech on Monday.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)
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