(The opinions expressed here are those of the author, a columnist for Reuters.)
LONDON, Sept 14 (Reuters) - In the decade since the collapse of Northern Rock crystallized the UK banking crisis, nobody would have made a single penny betting on the Bank of England raising interest rates.
Exactly 10 years to the day after the Bank came to the doomed mortgage lender's rescue, BoE policymakers sent out a stark warning to financial markets that the first rate hike since July 2007 could come in "the coming months".
The big question facing markets now is: is the Bank bluffing again, or is it really different this time?
The initial response in the hours following the Bank's hawkish statement would suggest the latter. A rate hike in December is now more likely than not, according to money market pricing which now implies a 56 percent likelihood.
Sterling and UK gilt yields jumped. The pound hit its highest in a year against the dollar and the 2-year yield is on course for its biggest weekly rise since February 2015, the second biggest weekly rise in over six years.
Traders are betting that the Bank is worried enough about inflation rising and sterling falling even further than they already have done since last year's Brexit vote to follow through this time and actually pull the trigger on rates.
We've been here before though. In the summer of 2013 governor Mark Carney introduced 'forward guidance' to steer expectations towards a rate hike when unemployment fell below 7 percent.
In July 2015 Carney indicated that interest rates may rise at "the turn of (that) year" and that rates would probably rise to around 2 percent by mid-2018.
But no rate hike materialized. Indeed the Bank halved rates to a new low of 0.25 percent following the Brexit referendum last year. And the unemployment rate? It's now at a 42-year low of 4.3 percent.
"KINDNESS OF STRANGERS"
Up until now, the missing piece in the puzzle has been inflation. But with inflation nudging the Bank's 3 percent ceiling thanks to the 15 percent fall in sterling, the Bank's calculus is different. And that means financial markets may have to think differently too.
Inflation in Britain was above the Bank's 2 percent target for virtually the entire eight-year period between 2006 and 2013. In the four years between April 2008 and April 2012 it was 3 percent or higher every single month bar 10, peaking at 5.2 percent in September 2008 and September 2011.
The Bank refrained from raising rates that entire period and inflation duly fell, so much so that 2015 was a year of zero price growth and slight deflation.
In the 2008-2012 period the trade-weighted value of sterling averaged 81.8. The day of the Brexit referendum it was around 88. Even taking into account its recovery in recent weeks it is still 12 percent down from pre-Brexit levels around 77.5.
It's worth laying this out because the exchange rate is one of the most important differences between now and these previous times in the post-crash recovery that the Bank has hinted rates may be about to rise.
The economy is now looking weak. According to Eurostat, Britain was the slowest-growing economy of all 28 European Union countries in the second quarter along with Portugal. It was also bottom of the table in the first quarter.
Above-target inflation is putting the squeeze on real earnings too, threatening to destabilize consumer spending, the bedrock of the economy. Another lurch lower in the pound could trigger another surge in prices, the hallmarks of a 'stagflation' economy.
This is what the Bank is desperate to avoid. Not only would it be a domestic economic nightmare to contend with, it could spark a crisis of confidence in UK Plc among foreign investors and potentially lead to a sterling crisis.
In the words of Mark Carney himself, Britain relies on the "kindness of strangers" to fund its current account deficit, which is one of the largest in the developed world. In sending out today's warning, maybe the Bank had an eye on supporting overseas demand for UK stocks, bonds and other assets too.
On the other hand, wage pressures remain muted. Will inflation really take off without the return of high and sustained wage growth? Unlikely, and perhaps what the Bank will point to if it repeats the pattern of recent years and doesn't raise rates.
In the days and weeks ahead, markets may well come round to that way of thinking too.
(Reporting by Jamie McGeever; Editing by Toby Chopra)