Bank of England is likely to raise interest rates faster than expected

AUD  USD price chart

It comes as market confidence returned following yesterday's Bank of England (BoE) suggestion that interest rates would need to be increased faster than initially expected.

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

Investors remain on edge after the latest selloff in global equities, as a burst of volatility hit long positions amid broader concerns that rising interest rates around the world could begin to reduce liquidity.

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.

Even a rise from 0.5% to 0.75% will feed through into higher mortgage rates.

The Bank of England today upgraded its growth forecast for the British economy next year - but warned borrowers to be braced for interest rate hikes.

The BoE said it wanted to return inflation to its 2 percent target over "a more conventional horizon", which would mean curbing price growth within two years rather than three.

Ben Broadbent doubled down on the hawkish message given by the Bank's monetary policy committee (MPC), of which he is a member, paving the way for a hike sooner than markets had previously priced in.

"Although the rate of GDP growth remains modest, the BoE believes that trend growth has fallen". Today, the price of crude oil has soared to the highest level in three years, which could affect the country's inflation.

RBA Governor Philip Lowe recently stated that unemployment was one of the key metrics in which improvement needed to be seen before policymakers would consider hiking borrowing costs.

While some of the data was positive, overall today's data docket has highlighted the uncertain state of the United Kingdom economy at the end of 2017.

But not everything in the garden is rosy.

We are driving along with the hand brake half on.

While a future rate rise is likely, current rates remain low.

"All told the MPC has signalled to markets that a May rate hike is under active consideration, but is far from guaranteed... we still think that the MPC will hold back until August", said Samuel Tombs, chief United Kingdom economist at Pantheon Macroeconomics. Despite last year's rate rise, there are misconceptions as to when consumers will actually see the results, particularly as some banks are failing to pass this on.

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.

The central bank raised its near-term growth projections, citing strengthening global growth, and forecast inflation to remain above 2% target over the forecast horizon.

Pay growth has gathered a bit of pace and Carney says it might overtake inflation this year, restoring some spending power to households.

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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