Mark Carney gets a lift as fewer expect early rise in interest rates

Bank of England Governor Mark Carney’s under fire forward-guidance strategy was given a rare boost today as a new survey showed that fewer people are anticipating an imminent rise in interest rates.

The proportion of people expecting a rise in rates over the next year was 29% in August, down from 34% three months earlier according to the Bank’s latest quarterly-inflation attitudes survey. That is the lowest proportion since the financial crisis began.

The public’s inflation expectations have also moderated with average expectation of inflation over the coming year declining to 3.2% in August, down from 3.6% in May.

The Bank has struggled to convince markets that it will hold down interest rates at their present record lows until 2016, subject to unemployment staying above 7% and inflation expectations remaining under control. City traders are presently pricing in a rate rise by late next year or early 2015, apparently expecting the improving economic outlook to force a rise in the base rate despite the Bank’s commitment.

But the inflation survey suggests the Canadian’s low interest rate message might be convincing the wider public. And moderating inflation expectations could strengthen Carney’s hand in relation to the markets because it diminishes the chances of one of the Bank’s inflation “knockouts” for forward guidance being activated.

The Bank’s survey showed that expectations of price rises in two years’ time were 3%, down from 3.3% three months earlier. And asked about price rises over five years, public expectations dipped slightly from  3.6% to 3.5%.

The Consumer Prices Index presently stands at 2.8%, still above the Bank’s official 2% target but down sharply from its recent peak of 5.2% in September 2011. The Bank’s survey was conducted between August 8 and August 13, just after Carney unveiled his forward-guidance policy.

Good news also came from research today showing that company pay rises are running at their fastest rate for more than a year.

In the three months to the end of August average take-home pay in the private sector was 2.4% higher than a year previously, according to data from VocaLink, which processes around  90 per cent of UK salary payments.

The gradual increase in pay awards suggests the squeeze on living standards that has prolonged Britain’s slump may soon be at an end for many. However, the Bank would worry if pay rises fed into rising prices, pushing up the inflation rate and expectations.