UK public inflation expectations have fallen to a 16-month low, according to data published on Friday which could add to the case for the Bank of England to leave interest rates at 4 percent next week.
The central bank’s latest quarterly survey found that, in February, households’ average expectation of the inflation rate over the next year was 3.9 percent, down from 4.8 percent in November last year and the lowest since November 2021.
Asked about expected inflation in the 12 months after February 2024, respondents on average said it would be 3 percent, down from 3.4 percent in the previous survey and also the lowest figure in a year.
Ahead of Thursday’s meeting of the BoE’s Monetary Policy Committee, which sets interest rate policy, the fall will be welcomed by policymakers, who feared that expectations of higher price growth could lead to prolonged inflation.
If people believe that prices will rise faster in the future than they are likely to push for larger wage increases, businesses will respond by raising their prices.
Long-term inflation expectations also fell to 3 percent, down from a peak of 3.5 percent in May last year, the survey said.
In a push to curb high inflation, the MPC has raised rates in 11 consecutive meetings from 0.1 percent in November 2021 to 4 percent now. But with the impact of rising borrowing costs becoming more visible, economists and markets are divided on what the committee will do on Thursday. Markets price in an approximately equally divided probability of a 25 percentage point increase or no change.
Martin Beck, chief economic adviser at EY Item Club, said the “significant” drop in inflation expectations offered “another reason for the MPC to keep interest rates unchanged” at its next meeting.
Unexpected easing in service sector inflation and the recent spate of wage growth, further declines in energy prices and market turmoil following issues in the banking sector abroad, the BoE’s latest survey findings mean the case for raising interest rates is being re-examined. More and more weak,” he said.
However, Paul Dales, chief UK economist at consultancy Capital Economics, said he expected the MPC to raise rates again to 4.25 percent. With inflation proving stickier than expected in the US and other countries, including the eurozone, “there is an appeal to err on the side of caution to make sure the job gets done”, he said.
Compared to the last quarterly survey, fewer respondents expected interest rates to continue rising and more thought they would remain unchanged over the next year.
Public dissatisfaction with the BoE’s approach to curbing inflation also fell to 30 percent, down from an all-time peak of 35 percent in November last year but still higher than the long-term average.