The Bank of England has said that higher inflation and a pick up in growth could lead to a rate hike in “the coming months”.
Members of the Bank’s nine-strong Monetary Policy Committee voted 7-2 to keep interest rates on hold at 0.25%.
But the committee was talking in much stronger terms about an increase, analysts said.
The pound climbed more than 1% against the dollar to $1.3363 after the Bank’s announcement.
Bank of England Governor Mark Carney said: “The majority of members of the Monetary Policy Committee, myself included, see that that balancing act is beginning to shift, and that in order to… return inflation to that 2% target in a sustainable manner, there may need to be some adjustment of interest rates in the coming months.
“Now, we’ll take that decision based on the data. But yes that possibility has definitely increased.”
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In minutes of its latest rates decision, the Monetary Policy Committee (MPC) said there was a “slightly stronger picture” for the economy since its forecasts last month thanks to signs of a firmer housing market, stronger employment and a rebound in retail and new car sales.
The nine policymakers on the panel believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
Rhetoric ‘ratcheted up’
The Bank reiterated that rates may need to rise by more than expected in financial markets.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the MPC had “ratcheted up” its rhetoric surrounding a rate rise.
Paul Hollingsworth, UK economist at Capital Economics, said the MPC could increase interest rates in November.
“If the economy continues to hold up, and there are clearer signs that wage growth is building, then the first hike could come somewhat earlier than we had previously envisaged, possibly as soon as the next meeting in November alongside the Inflation Report,” he said.
However, some analysts were more sceptical.
James Athey, investment manager at Aberdeen Standard Investments, said: “There’s some fairly strong rhetoric today implying that the Bank could raise rates earlier than people expected.
“They’re doing this because they want financial markets to support sterling since this would help deal with the current bout of inflation.
“But the reality is that they aren’t going to raise rates particularly soon. So they’re playing a game of chicken with financial markets and will keep this up as long as they can.”