In a speech on Friday, Bank of England external Monetray Policy Committee (MPC) member Vlieghe stated that the period of de-leveraging in the UK economy appeared to be coming to a close and that this would suggest that the equilibrium level of interest rates would start to increase slightly from very low levels.
His opinion until recently was that patience was required on interest rates given modest growth and subdued inflationary pressure. According to Vlieghe, the evolution of the data, however, is increasingly suggesting that the moment is approaching when interest rates may need to rise.
He stated that the amount of slack in the economy continues to be eroded despite weakening GDP growth while the labour market is still tightening and wage growth is not as weak as it was earlier in the year.
The global economy is also performing more strongly which will help underpin UK demand.
There were still important reservations over the outlook, especially in view of continued uncertainty surrounding the Brexit process and that investment spending is liable to be subdued.
Overall, he concluded that a rate hike as early as the coming months would be appropriate if declining slack and rising pay pressures continue.
The comments represent a significant shift from Vlieghe who has been one of the most dovish members on the MPC. In this context, there will be a further strengthening of expectations surrounding a November rate hike.
Sterling moved sharply higher again following the data with GBP/USD breaking above 1.3500 while EUR/GBP dipped sharply to 8-week lows near 0.8810. Gilts registered further losses with a decline of close to 30 ticks after a decline of over a point on Thursday.