Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis, Bank of England Governor Mark Carney signalled, sending sterling shooting to a five-year high against the U.S. dollar on Friday.

Government bond yields soared, construction stocks tumbled and interest rate futures priced in a first hike by December after Carney said rates could rise sooner than financial markets had thought — his most hawkish signal to date.

"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," Carney, who until last year was the former head of the Bank of Canada, said in a speech late on Thursday. "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.

Rate shift points to buoyant economy

Carney said Britain's economy still had scope to grow without pushing up inflation, which stood at 1.8 per cent 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 Britain's Conservative and Liberal Democrat coalition by raising mortgage costs for home-owners at time when the Labour opposition is highlighting the cost of living.

The pound sterling hit a 5-1/2 year high against a trade-weighted basket of currencies. Short sterling rate futures fell, pricing in the first hike by December. The interbank interest rate curve (SONIA) also pointed to a rate rise by the end of the year, compared with the first quarter of 2015 on Thursday.

"The BoE seems to be slightly ahead of the Fed as far as rate hikes are concerned," said Lutz Karpowitz, currency analyst at Commerzbank. The U.S. central bank is still sending a dovish message that rates will remain low for an extended period.

Now analysts are wondering how long it will be before the U.S. Fed follows suit and changes its guidance on interest rates.

Will Fed follow?

Like Fed chair Janet Yellen, Carney was dovish on rates just one month ago. But the economic data for Britain has changed, coming in stronger than expected, just as it has for the U.S.

Citi FX analyst Steven Englander raised the issue in a note to investors.

“[It is] possible that the shift in the BoE stance may also be affecting how investors are viewing the likely evolution of Fed monetary policy,” he wrote.

“The worry may be that just as U.K. forward guidance proved to be less guiding than investors had earlier thought, the Fed may turn around, and use the same language as Governor Carney in shifting the timing of policy moves.”

He pointed out that the Bank of England has been ahead of the Fed in its easing policies and its discussion of housing and wage levels.

If the Fed raises rates, Canada's central bank won't be far behind.

Rob Wood, chief U.K. economist at German bank Berenberg, said Carney's shift reflected the British economy's buoyancy.

"It is flying now. Employment is rising at a record pace, and we see no sign of economic growth slowing from its current approaching 4 percent annualised pace," Wood said.

Carney to tackle housing market next

Speaking alongside British finance minister George Osborne, Carney also said the central bank 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 BoE 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.

On Thursday, he said 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.

Britain's record current account deficit was not an immediate cause for alarm, he added, but it was only sustainable to borrow from abroad to fund investment, not consumption.

"Excessive reliance on consumption or non-tradable sectors, such as housing, all financed by borrowing abroad at an over-valued exchange rate, would prove only temporarily satisfying," he said.

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 BoE's financial policy committee, which meets next week, as insurance against future risks. 

With files from CBC News