'34% expecting interest rate rise'

Further doubts were 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% are braced for rates to rise over the next 12 months, up from 29% 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% from 3.2% 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% until the unemployment rate drops to 7%.

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 7% threshold is expected to be reached earlier than it originally predicted, Mr Carney s tressed 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 yesterday voted once more to keep rates on hold at 0.5% and maintain its quantitative easing programme at £375 billion.

Its decision came as Chancellor George Osborne hailed sharp increases in UK growth prospects in his Autumn Statement after the Office for Budget Responsibility increased its growth predictions to 2.4% for 2014, up from the previous 1.8% estimate.

The Bank's survey, which polled 1,983 people across the UK last month, confirmed the squeeze on household finances as those polled said they believed inflation currently stood at 4.4% - far higher than the 2.2% actual rate.

Fewer respondents also believed rates would stay the same over the next year, at 43% against 49% in August, although the Bank said this was the second highest reading since the survey began in 1999.

It added that the level of those expecting rates to rise over the next 12 months is still significantly lower than the 48% average reading since 1999, and the 52% average reading in 2010 when economic growth was last as strong.

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