Financial markets have interpreted comments by the governor of the Bank of England as making a rise in interest rates more likely.
Sterling shot up against the dollar as Mark Carney made his remarks at a European Central Bank event in Portugal.
Having declared last week that “now is not yet the time” to raise borrowing costs, he set out the conditions under which he could support an increase and stressed there could only be limited tolerance to above-target inflation.
His comments are in sharp focus as they follow a shock split vote on the Bank’s monetary policy committee (MPC) earlier this month.
Video: Carney: not yet the time for rate rise
It showed that outgoing MPC member Kristin Forbes, Ian McCafferty and Michael Saunders all in support of a rise in rates, from their record low 0.25%, to help tackle rising inflation.
:: Forbes: Low interest rates no longer justified
There was further surprise last week when the Bank’s chief economist, Andy Haldane, indicated he was on track to support a rise later this year.
Ahead of this month’s MPC vote, financial markets were forecasting no increase until 2019 at the earliest.
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Mr Carney said on Wednesday: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.
“The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations.
“These are some of the issues that the MPC will debate in the coming months.”
Video: Carney: A ‘challenging time for households’
Neil Wilson, senior market analyst at ETX Capital, said: “Sterling leapt above $1.29 to its strongest in three weeks after a surprising intervention from Bank of England governor Mark Carney, while continued dollar softness offered further support.
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“The merest hint of removing some accommodation lifted cable past $1.2970 and the pound is now well clear of the sub-$1.26 level it traded at a week before.”
He added: “It’s the clearest signal yet that the Bank is minded to tighten.
“There is a sense the MPC may wish to ‘correct’ its rate cut last summer in light of a surprisingly resilient UK economy and rising inflation, which is accelerating quicker than the Bank expected.”
Howard Archer, chief economic adviser to EY Item Club, does not expect to see a rate rise this year.
“For the time being, the governor still looks to be in wait-and-see mode,” he said.
The MPC’s next meeting is held in August.
Source: SKY News