December 8, 2017 / 9:38 AM / 9 days ago

UK public's inflation outlook rises to four-year high, BoE survey shows

LONDON (Reuters) - The British public expects the Bank of England to overshoot its inflation target by the most since 2013 in coming years and foresee the biggest chance of further interest rate rises in over a decade, a BoE survey showed on Friday.

The central bank raised interest rates last month, the first increase since 2007, and said more increases were likely as consumer price inflation held at 3 percent, its highest in five years, during September and October.

Policymakers keep a close eye on gauges of how the public think inflation will change in future. Entrenched expectations of high inflation can make it harder to return inflation to its 2 percent target.

The BoE’s latest quarterly survey of the public’s inflation perceptions showed that expectations for average inflation in two years’ time rose to 2.9 percent from 2.7 percent, its highest since November 2013.

Nonetheless, economists said the BoE’s Monetary Policy Committee would be relieved by the relatively modest rise in public expectations given the increase in current inflation.

“The MPC will likely take comfort from the fact consumer price inflation reaching a five-and-a-half-year high ... has not led to a significant de-anchoring of inflation expectations,” EY Item Club’s chief UK economist Howard Archer said.

Britons see inflation in five years’ time at 3.5 percent, also the highest since November 2013. The proportion expecting another BoE rate rise within the next 12 months rose to 63 percent, the highest since 2007.

BoE Governor Mark Carney said the central bank expected to raise interest rates “very gradually” over the next couple of years, although much would depend on how smoothly Britain departed from the European Union. It expects inflation will fall to 2.2 percent by late 2019.

Earlier on Friday, Britain and the EU broke an impasse over EU citizens’ post-Brexit residence rights, outstanding financial liabilities and border arrangements between Northern Ireland and the Irish Republic.

While surveys of inflation expectations play an important role in economic theory and central banks’ economic models, some policymakers view their implications as far from clear.

Public expectations in the past have appeared to lag - rather than predict - future inflation, and many Britons still focus on the higher, but outdated, measure of retail price inflation which the BoE no longer targets.

The BoE survey was conducted by pollsters TNS and based on responses from 2,097 people in the days just after the BoE raised interest rates on Nov. 2.

Reporting by David Milliken, editing by Andy Bruce, editing by Larry King

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