Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis, Bank of England Governor Mark Carney signalled.
Mark Carney said rates could rise sooner than financial markets had thought - his most hawkish signal to date - in a speech late last night.
"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," Carney said. "It could happen sooner than markets currently expect."
Relatively few economists had expected rates to increase until the second quarter of next year given the central bank's previous long term "forward guidance".
The increase would be the first since July 2007.
Carney said Britain's economy still had scope to grow without pushing up inflation, which stood at 1.8% in the year to April.
But he saw little sign yet of a slowdown in the pace of expansion that the central bank had pencilled in for the second half of the year.
This brings into view one or more interest rate rises before a general election due next May - something that could hurt the Conservative and Liberal Democrat coalition by raising mortgage costs for home-owners at time when the Labour opposition is highlighting the cost of living.
Speaking alongside British finance minister George Osborne, Carney also said the Bank of England would carefully weigh the merits next week of tackling housing market risks, including an undesirable loosening in mortgage underwriting standards.
Osborne said he would grant the BoE new powers to impose maximum loan-to-value and loan-to-income ratios on mortgage lending, which Carney welcomed in his speech to London's financial community.
Last month, a minority of Bank of England policymakers said the case for a rate rise was "more balanced" and that interest rates might need to increase sooner rather than later to ensure they did not need to rise sharply.
But Carney had until now appeared less keen to contemplate tightening, emphasising that Britain's economy was still a long way from full strength.
He said last night that more important than the timing of a first rate rise was that future increases be "gradual and limited", in part due to high household indebtedness and a drag on growth from a stronger currency.
He also said the timing of a rise would depend on incoming data, and the bank had no fixed plan on when to raise rates.
Carney said he was also concerned by signs that mortgage lending standards were becoming looser and set out the case for early action by the Bank of England's Financial Policy Committee, which meets next week, as insurance against future risks.