The Bank of England is poised to turn off its money-printing press next month, fearful that inflation will now be greater than expected and prepared to gamble that Britain's economic recovery remains on track.
Minutes of the bank's April meeting, combined with a stark warning on inflation from deputy governor Paul Tucker on the same day, signalled a sharp change in tone that could bring forward expectations for interest rate rises.
The pound shot up to a 19-month high against the euro and a in a trade-weighted basket. Evidence that the UK economy may be on the mend - something that would make further BoE stimulus unnecessary - came from government data showing an unexpected fall in unemployment in the three months to February.
Britain's economy has not yet recovered from the 2007-2009 crisis, but the central bank said that while official figures could well show that the country had slipped back into recession, business surveys pointed to underlying growth.
Mr Tucker, meanwhile, said that recent inflation news had been "bad", including data yesterday showing higher fuel, food and clothing costs had pushed inflation higher for the first time in six months.
It was a message echoed in the minutes, in which the long-standing flag-bearer for further bank asset-buying, or quantitative easing, Adam Posen, dropped his call for more quantative easing, leaving only one policymaker supporting more potentially inflationary stimulus.
"Monetary policy will underpin the recovery so long as that remains consistent with anchoring inflation expectations in line with achieving the 2 per cent target over the medium run," Mr Tucker said in a speech. "We shall not let that slip."
Reuters polls up until now have shown most economists do not expect a rate rise before 2014, but today's joint events could shift this.
"The Tucker speech was the big thing and the QE vote in the minutes goes with the grain of that," said Ross Walker of RBS.
"Tucker talked about the risks of inflation being above 3 per cent going into the second half of this year. In February they had forecast inflation at just over 2.5 per cent in Q3, so to get an outturn that's closer to 3 per cent would be a big miss."
Reuters
