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UK economy News - Last Updated Wednesday 16th May 2007

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Consumers expect more rate rises

Wednesday 16th May 2007

The majority of UK consumers expect interest rates to rise further over the coming year according to new research.

Some 80 per cent of people questioned by Lloyds TSB Corporate Markets predicted higher interest rates this time next year.

Earlier this month the Bank of England raised interest rates to 5.5 per cent, while inflation in April was shown to have subsided to 2.8 per cent in figures released this week.

Just four per cent said they expected the cost of borrowing to fall following last week's quarter per cent rise in the benchmark rate of interest, with Lloyds TSB's latest consumer barometer recording an overall balance of 76 per cent in April - up seven per cent on the previous month.

The bank said last month's balance equalled a high recorded in January, when consumers were previously at their most pessimistic about the outlook for interest rates.

Consumers also grew more concerned about the prospect of rising inflation in April, with the balance of people believing that prices had risen rather than fallen over the past 12 months up to a six-month high of 63 per cent.

However despite growing concern about rising interest rates and inflation, consumer optimism over future job prospects remained strong.

The balance of consumers feeling that the employment outlook across the UK is better now than it was 12 months ago was up one point in April to 21 per cent.

Lloyds TSB Corporate Markets said that the impact on consumer spending was unlikely to be significant as a result.

"Pretty much everyone expected the base rate to rise last week," said the firm's chief economist Trevor Williams, who stressed that forewarnings over last week's rate rise were likely to help minimise the impact on the high street.

"With high price expectations and the recent rate rise we’re likely to see some slowdown in consumer spending but with job security remaining strong, the impact won’t be drastic," he added.

Last week a consumer confidence index published by the Nationwide reported a fourth consecutive monthly rise in Britons' optimism in the UK economy.

The balance of consumers who had confidence in the current financial climate climbed two points in April to 90 – the highest level reported by Nationwide since October 2006.