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Interest rates: UK households expect Bank of England to continue hawkish stance

UK interest rates: People walk past Bank of England in the City of London
A November 0.75% rise will be the eighth consecutive jump in interest rates by the UK central bank and will represent the biggest increase since 1989. Photo: Maja Smiejkowska/Reuters

The Bank of England (BoE) is expected to continue its hawkish stance on interest rates over the next three months as it looks to tame soaring inflation, a new survey has shown.

Expectations amongst UK households remain closely aligned to financial markets, which are anticipating a 75 basis point hike at the next meeting on 3 November. This will bring interest rates to 3%.

The BoE hiked interest rates by 50bps to 2.25% when the Monetary Police Committee (MPC) met on 22 September.

According to S&P Global’s household interest rate expectations index, the net balance of UK households expecting imminent rate hikes has hit a fresh peak of 64% — the highest reading since data was first compiled in 2013.

Meanwhile the proportion expecting rates to rise within the next three months is at a record 69%, up from 66% in September, and a high of 81% of households anticipate a hike within the next six months.

Just 5% of households surveyed between 13 and 19 October think the central bank will cut rates, unchanged on the month, and amongst the smallest proportion on record.

The survey is based on monthly responses from approximately 1,500 individuals in the UK, with data collected by Ipsos MORI from its panel of respondents aged 18-64.

Read more: Interest rate rises only way to tame UK inflation, warns Bank of England deputy governor

Analysts at Deutsche Bank (DB) have said they expect the Bank of England to opt for a 0.75 percentage point rise with a split vote.

Meanwhile, BoE governor Andrew Bailey said: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

“It’s clear from the survey data that households remain steadfast in expectations the Bank of England will adopt an aggressive monetary policy stance in order to combat rising inflation,” Lewis Cooper, economist at S&P Global Market Intelligence, said.

“However, the peak of the rate hike cycle is less clear, with latest PMI business survey data pointing to an intensifying economic downturn in the UK, albeit with inflationary pressures sharply elevated, suggesting that higher borrowing costs are already having a significant negative impact on business and consumer demand.”

Watch: What is a recession and how do we spot one?

But the MPC meeting comes amid warnings that spending cuts and tax hikes under prime minister Rishi Sunak could lead to a deeper and more enduring recession.

UK inflation rose above 10% for the second time in 2022 in the year to September amid the sharpest annual rise in food prices for more than 40 years.

The Office for National Statistics (ONS) said the consumer prices index rose to 10.1%, returning to double digits after a slight dip to 9.9% in August. City economists had forecast a slightly smaller rise to 10%.

Soaring food and drink prices were the biggest driver behind the cost of living increase.

Read more: Bank of England warns UK households may face 2008 financial crisis mortgage strain

Threadneedle Street has been battling runaway inflation this year in a bid to bring it back down to its 2% target. It has raised interest rates from record lows of 0.1% in the pandemic to the current 2.25% rate.

A November 0.75% rise will be the eighth consecutive jump in interest rates by the UK central bank and would represent the biggest increase since 1989.

Interest rate rises also means that households are now under pressure from ballooning mortgage costs.

Watch: How does inflation affect interest rates?