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June 13, 2008    

BoE survey reveals Britons fears on prices and rates

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by Kay Murchie

The Bank of England’s latest survey of inflation expectations has revealed that the British public expects the cost of living to escalate at more than double the rate of official targets in the next 12 months.

According to the Bank’s quarterly attitudes survey, the majority of those questioned forecast the average rate of inflation to be 4.3% in the next year, more than double the 2% target.

Consumers believe that the ‘true’ rate of inflation is 4.9% and that interest rates will have to rise to control it.

Britain’s official rate of inflation is actually 3% but it is expected to rise significantly over the next few months.

The Bank of England deem the public perceptions of the cost of living important as they can result in higher wage demands that further stoke inflation.

Nearly half of the respondents in the survey said they expected interest rates to rise from 5% over the next year while 17% believed they would fall.

The results of the survey reflect the pressure mounting on the public from surging petrol, food and energy costs at a time when banks, hit by the credit crunch, are raising mortgage rates.

Commenting on the figures, Capital Economics said while the link between the public’s inflation expectations and wider inflationary pressures is uncertain to say the least, these figures will reinforce fears that the next move in interest rates could be up.

Howard Archer, chief UK and European Economist at Global Insight, added we still believe that the ultimate next move in interest rates will be down, but the sharp rise in inflation expectations in May reinforces our view that the Bank of England will not be prepared to relax monetary policy for many months to come.

A report earlier this week said City analysts have been predicting interest rate falls to 4.5% by the end of 2008. However, they are now gambling that rates will have to increase from the current level of 5% to manage runaway inflation.

City economists said that at the very best, all hopes of an interest rate cut this year have now been snuffed out.

The International Monetary Fund expects the UK to be the G7′s fastest growing economy in 2008.

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