UK Households Expect Interest Rates Rise Before 2015

Most UK households expect the Bank of England to hike interest rates within six months.

And they are increasingly pessimistic about their financial prospects, despite the strengthening UK economic recovery.

According to a survey by research firm Markit, 60% of the 1,500 Britons polled in June said they expect interest rates to rise before 2015. That is double the 30% who said the same in May.

Moreover, Markit's index for perceived financial wellbeing over the coming 12 months slumped to 48.4 in June, down sharply from 51.7 in May and well below the neutral 50 mark – signifying a slide from optimism into pessimism.

Mark Carney, governor of the Bank of England, threw markets a curveball in his annual Mansion House speech by saying higher interest rates may come sooner than expected.

Analysts have predicted the central bank will lift rates at some point in mid-2015 as the recovery powers on. But the economy has performed better than many were forecasting, causing the Bank of England to think again about when it will hike interest rates.

There are concerns that some households' finances will reach breaking point when the Bank of England raises its base rate from the record-low 0.5%, where it has sat since 2009 to keep credit cheap and banks lending while the economy was depressed.

Around three quarters of debt in the UK is held with a variable interest rate. This means when the central bank lifts rates people will pay more to service their debt each month, leaving them with less to spend in the economy and potentially pushing some to default.

"The fall in households' financial expectations coincides with greater prospects of an interest rate hike before the end of 2014," said Tim Moore, senior economist at Markit.

"Looking ahead, policymakers will be keeping a close eye on households' reaction to the possibility of more expensive mortgages, given the need to ensure that consumer demand is not choked off by further shifts towards policy tightening."

To fend off the risk of an interest rates shock, Bank of England policymakers have repeatedly pointed out that any increases in its base rate will be small.