The pound rose more than half a cent against the dollar after the Bank of England hinted that a further rate rise might come sooner than expected.
The monetary policy committee (MPC) kept interest rates unchanged at 0.5% but took a hawkish stand, saying rates would have to be reviewed “somewhat earlier than anticipated”.
The MPC still stressed, however, that any future interest rate rises are expected to be "gradual and to a limited extent”.
The comment came on the back of a higher growth forecast, with the Bank expecting an average annual expansion of 1.75% over the next three years.
Sterling rose from $1.3877 at the start of trading to $1.3946 by close on Thursday, having briefly passed the $1.40 mark.
“The improved growth outlook supports our view that Sterling will continue to strengthen in the coming months,” said Miles Eakers, chief market analyst at Centtrip.
Jordan Hiscott, chief trader at ayondo markets, said the job “had just got a little more difficult” for the MPC.
“Contrary to various negative outlooks for Britain, cited by many pro EU commentators, growth has actually been upgraded,” he said.
“The Bank sees growth at 1.8% this year, with demand interestingly coming from outside the EU. The unexpected nature of this propelled GBP/USD to a high of 1.4015, as traders and speculators position themselves for a potential interest rate rise, possibly as soon as May.”
Rates 'could rise to 1.75% by 2020'
The EY ITEM Club is forecasting two hikes in 2018, with interest rates at 1.75% by end of 2020.
“With the economy now seemingly on a modestly firmer footing, the labour market tight, inflation markedly above its target level and interest rates of just 0.50% still marking an emergency rate, there is a clear case for the Bank of England to move towards normalising monetary policy,” said Howard Archer, chief economic advisor to the EY ITEM Club.
“We expect the MPC to lift interest rates from 0.50% to 0.75% in May, followed by a further increase to 1.0% in November. We see one interest rate hike to 1.25% during 2019, and another two interest rate hikes in 2020, taking interest rates up to 1.75% by the end of the year.”