Doubts cast over Bank pledge to freeze interest rate

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Further doubts have been cast over the Bank of England’s pledge to keep interest rates at record lows after a survey showed more than a third of Britons expect the cost of borrowing to rise within a year.

The Bank’s quarterly poll revealed that 34 per cent are braced for rates to rise over the next 12 months, up from 29 per cent in August.

In another blow for the Bank’s forward guidance policy, it also revealed that inflation expectations over the next year rose to 3.6 per cent from 3.2 per cent in August.

Rising inflation expectations are one of three so-called “knock-outs” that could see the Bank break its pledge to keep rates at 0.5 per cent until the unemployment rate drops to seven per cent.

The Bank’s rates policy has come under pressure from the start because unemployment has fallen faster than expected as Britain’s recovery has picked up pace.

Bank Governor Mark Carney has sought to allay fears that the better prospects could mean interest rates rising sooner than expected.

While the Bank admits the seven per cent threshold is expected to be reached earlier than it originally predicted, Mr Carney stressed recently to markets that this would not automatically trigger a rate rise.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “On the face of it, this is a double whammy of bad news for the Bank of England.”

But he added that the survey was unlikely to derail the Bank’s pledge.

He said: “The Bank of England will remain in no hurry to raise interest rates despite its lower unemployment forecasts and improved growth expectations, barring any nasty inflation shock over the coming months.

“It is clear that the Bank wants to give the economy every chance to develop sustainable decent growth and not to risk choking it off by any premature increasing of interest rates.”

The Bank voted again on Thursday to keep rates on hold at 0.5 per cent and maintain its quantitative easing programme at £375bn.