Bank of England signals steeper interest rate rises to reign in inflation

Pound to euro exchange rate

Pound to euro exchange rate

Already market expectations are outpacing the bank's revised forward guidance for three rate hikes over three years.

Following the publication of the bank's quarterly Inflation Report alongside its rate decision, Governor Mark Carney hinted that a quarter-point hike in United Kingdom interest rates is now possible as soon as May.

A day after the Bank of England hinted that it could raise interest rates faster than many expected, a run of economic figures on Friday suggest the British economy did not end 2017 as strongly as previously thought.

Investors see a almost 50-50 chance of a new hike in May and some economists are predicting two increases this year alone.

"Although the MPC voted 9-0 this month in favour of holding interest rates, it has put the prospect of a May rise firmly on the table". Over the past year, stocks, particularly in the USA, have seemingly been on a never-ending rise with little pullback.

This was stated by the regulator at their meeting on Thursday.

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He has additionally hinted at raising United Kingdom interest rates in the near-future, assuming that Brexit negotiations continue to go smoothly.

Sterling spiked 0.8% to $1.399 and 0.3% to €1.345 against the euro after the announcement, while the FTSE 100 is down nearly 1% to 7,210 points.

Though the outlook for the British economy is conditional on the outcome of the Brexit discussions, particularly what the future trading relationship with the European Union will be, the central bank said "monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent" than it anticipated in November.

Investors moved swiftly to price in a growing likelihood of a quarter-point interest rate hike in May to 0.75 percent, which would be the bank's second increase in six months.

That is a long way below Britain's pre-financial crisis average of about 2.9 percent, but the BoE says the economy can now only grow by around 1.5 percent a year without overheating.

"The Committee judges that... monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report", minutes from the Monetary Policy Committee's (MPC) meeting said.

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In the Inflation Report, the bank said UK GDP growth was projected to remain around its current pace, a slightly stronger near-term outlook than in November, underpinned by strengthening global growth. Policymakers also surprised the market by shortened the horizon by which it targets inflation returning back to its 2% target.

"Although the rate of GDP growth remains modest, the bank believes that trend growth has fallen".

But it will fuel criticisms that long-term economic forecasts are inaccurate and can not be trusted - just as the Government has been forced to publish reports about the possible economic impact of Brexit.

"I think there are some very big differences and as I pointed out, the equity markets, particularly in the United States, have risen a lot over the last 12 months and indeed, even today, we are roughly back where we were a couple of months ago". Following his comments, the chances of a May rate increase climbed to 67% judging by market prices.

The chancellor replied by stressing the importance of boosting United Kingdom productivity and the government's efforts to make that happen.

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