Consumer interest rate fears reach record high

UK consumers are more pessimistic about the direction of interest rates than at any time since November 2004, according to the Consumer Barometer from Lloyds TSB Corporate Markets.

The survey of more than 2,000 people showed that 80 per cent of Britons expect interest rates to be higher this time next year than they are now – the highest response since the survey began in November 2004. Only 4 per cent of people anticipate a fall in rates over the coming year – again, the lowest response in 2 years.

Trevor Williams, chief economist at Lloyds TSB Corporate Markets, said: “Rate rises in recent months have obviously dampened consumer optimism and despite the bank rate holding at five per cent this month, consumers are expecting the gloom to continue well into 2007.

“However, this widely held belief that rates are on an upward spiral is at odds with the views of the majority of economists who believe that rates may not rise any further and, perversely, does not seem to have quashed the insatiable drive that continues to buoy the housing market.”

This outlook for interest rates may have been fuelled by consumers’ belief that price inflation has accelerated and will continue to rise. Of the people surveyed, 62 per cent feel that prices have risen in the last year, up from 60 per cent in October.

In addition, 79 per cent expect prices to rise further in the next 12 months, up from 77 per cent in October. The MPC may be concerned about the impacts of this price inflation on wage settlements in the coming months.

The survey also shows that, after improving in recent months, employment confidence fell back sharply in November. More workers feel their job is currently less, rather than more, secure compared to this time a year ago. There was also deterioration in consumers’ views about the UK’s job market in general. The balance of respondents that believed employment prospects were better rather than worse than a year ago fell to -28 per cent from -23 per cent. However, with unemployment in November registering the biggest decline since January 2005, job confidence is likely to improve in the months ahead.