Bank of England governor Mark Carney has warned that base rates could rise sooner than markets currently expect.
He made his comments at the annual Mansion House black-tie dinner in the City, shortly before Chancellor George Osborne was due to speak.
It follows growing speculation that the Bank of England will use alternative measures to calm the housing market, such as setting caps on lending.
Carney said the UK economy is currently unbalanced internally and externally.
He said the Monetary Policy Committee (MPC) will set monetary policy to meet the inflation target, while using up wasteful spare capacity in the economy.
"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.
"It could happen sooner than markets currently expect."
Carney said growth has been much stronger and unemployment has fallen much faster than anybody expected one year ago.
"So far this has been largely matched by indicators which suggest that there is more supply capacity in the labour market than we had previously thought.
"As a result of these two welcome developments, despite rapid jobs growth, pay pressures and unit labour cost growth have remained subdued."
But the MPC expects the rate at which slack is being eroded to slow during the second half of this year as output growth eases and productivity growth recovers."
Carney said that when rates do rise, it will be "gradual and limited".
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