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(Bloomberg) — UK households expect interest rates to rise in response to a resurgence in inflation, despite the Bank of England pledging to continue gradually easing policy.

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The central bank’s quarterly Inflation Attitudes Survey published Friday showed that more Britons expect rates to rise than fall over the next 12 months, with over a third of people questioned expecting the cost of borrowing to increase.

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It is the first time more have expected hikes rather than cuts since the BOE started to loosen policy in August last year.

The findings show the communications challenge facing BOE Governor Andrew Bailey and his Monetary Policy Committee, which has lowered bank rate three times and signaled further cuts at a “gradual and careful” pace as underlying price pressures recede. Traders are fully pricing in two more reductions this year and a 20% chance of a third.

However, households appear to be reacting to a fresh pickup in headline inflation, with the BOE expecting price growth to peak at 3.7% later this year — almost double the 2% target — amid increasing energy and food costs. It suggests under-pressure consumers are likely to remain cautious about spending. 

Worryingly for the BOE, anxieties over the cost of living are now pushing up inflation expectations, which could lead workers to demand higher pay and firms to raise prices. The median expectation in February was for prices to rise 3.4% over the following year, the most since mid-2023 and up from 3% previously. Expectations for the year after hit the highest since November 2022 when inflation was at double digits.

The survey will be a concern for rate-setters ahead of their meeting next week. The nine-member MPC is widely expected to leave rates unchanged at 4.5% and reiterate its cautious guidance. 

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