UK public’s expectations for interest rate hike declines, despite Bank of England guidance

The general public’s expectations that interest rates will rise over the next year have declined, despite the guidance from the Bank of England that the cost of borrowing is likely to go up over that time.

The latest Inflation Attitudes survey conducted by TNS from the Bank shows that the proportion of respondents who think rates will rise over the next 12 months was 51 per cent, down from 58 per cent in February.

Last November the proportion was 63 per cent.

And a quarter of respondents said they had no idea how rates were likely to change over the next year – the highest in the survey’s 18-year history.

The survey was conducted between 4 and 8 May. On 10 May the Bank held off from a rate rise citing the slump in GDP growth in the first quarter of 2018 to a five-year low as a reason to delay.

However, the Bank’s Governor, Mark Carney, also stressed at that time that “if the economy evolves in line with…projections…a modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target”.

And the Bank’s deputy governor, Dave Ramsden, said on Thursday that without three rate rises over the next three years inflation was likely to remain over the Bank’s official 2 per cent target.

Financial markets are currently pricing in a reasonably high probability that the Bank will hike rates again as soon as August, from 0.5 per cent to 0.75 per cent.

The Bank has argued that the slump in GDP growth in the first quarter of the year to just 0.1 per cent was essentially a consequence of the bad weather in February and March and that the economy will likely bounce back to 0.4 per cent growth in the second quarter.

Mr Ramsden said that the survey data released over the past month so far supported that view.

Other findings from the latest TNS survey were that that 22 per cent of people thought rates might stay the same over the next year, up from 18 per cent in February.

And asked to give the current rate of inflation, the median answer was 3.1 per cent, the same as April. Median expectations for inflation over the coming year were 2.9 per cent, unchanged from February.

Consumer Price Index inflation actually dipped unexpectedly to 2.4 per cent in April.

“Slightly disappointing news for the Bank of England,” said Howard Archer of the EY Item Club. “It may well be that highly visible rising petrol prices have prevented inflation expectations from falling back.”

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