UK households are starting to feel a little less anxious about inflation, according to a fresh survey from Citi and YouGov. But that hasn't changed the market's expectation that the Bank of England (BoE) will raise interest rates again next Thursday.
The survey, which tracks how households view future price rises, found that expectations for inflation five or more years out dipped to 4% in October, down from 4.3% in September. Expectations for the year ahead also eased, falling to 4.2% from 4.5%.
While that might sound like good news, the drop wasn't dramatic, and it didn't come with an obvious cause. Citi noted that energy prices rose through October and tensions in the Middle East remained high—both factors that can keep inflation risks alive. That's why the bank thinks one better reading won't change how policymakers typically respond to new data.
Why inflation expectations matter
The BoE watches inflation expectations closely because they can become self-fulfilling. If people expect prices to keep climbing, workers may push harder for bigger pay raises, and companies may feel more able to lift their own prices. That can feed into actual inflation, even if the original drivers—like energy costs—start to fade.
So when expectations fall, it's a sign that households are becoming less convinced that high inflation is here to stay. That can help the BoE feel less pressure to keep hiking rates aggressively.
But the central bank's job isn't just about what people think today. It's also about what they might think tomorrow. If inflation expectations stay elevated, the BoE may worry that it needs to act more forcefully to keep them anchored.
What the market expects
Despite the cooler survey, investors still price in a quarter-point rate hike at the BoE's next meeting, scheduled for next Thursday. That would take the Bank Rate to 5.25% from 5%.
Citi says another move in the first quarter of next year also remains likely. That suggests the central bank is still in tightening mode, even as some signs point to inflation pressures easing.
The BoE has been raising rates for over a year to combat inflation, which has been running well above its 2% target. While recent data has shown some cooling, the central bank has repeatedly stressed that it will do what it takes to bring inflation down.
What it means for your money
For households, the immediate impact of a rate hike is most visible in mortgage payments. If you're on a tracker mortgage, your rate usually moves almost automatically with the Bank Rate. A quarter-point hike would add roughly £25 a month for every £100,000 of outstanding mortgage, depending on the exact terms.
Standard variable rate (SVR) mortgages often follow too, as lenders' own funding costs rise with short-term rates. That means if you're on an SVR, you could see your monthly payment go up soon after the BoE's decision.
Fixed-rate mortgages work differently. Lenders typically price these based on interest-rate swaps, which reflect the market's expected path for the policy rate over the next few years. So a single month of cooler inflation expectations usually won't make remortgage quotes meaningfully cheaper unless it changes that expected path.
The upshot: payment pressure is most immediate for households on trackers or standard variable rates. People coming off a fixed deal may keep seeing high offers until markets stop expecting more hikes.
For investors, the BoE's path matters beyond mortgages. Higher rates tend to weigh on stock valuations, especially for growth companies that promise big future earnings. Sectors like utilities and real estate, which carry high debt, can also feel the pinch. On the flip side, banks often benefit from higher rates because they can earn more on the gap between what they pay savers and what they charge borrowers.
If you're invested in UK stocks or bonds, keep an eye on the BoE's decision next week. The market's reaction will likely hinge on the tone of the statement and whether policymakers signal more hikes to come.
For now, the message from the survey is that inflation worries are easing, but not enough to change the central bank's course. As Citi puts it, one better reading won't alter the BoE's "reaction function"—the way it typically responds to new data.
So while the direction may be encouraging, the immediate reality is that borrowing costs are still heading up. If you're on a variable-rate mortgage, it might be worth planning for another increase. If you're saving, higher rates could mean better returns on cash accounts—though inflation still eats into those gains.
As always, it's wise to review your own financial situation and consider whether you need to adjust your budget or savings strategy. But for the broader picture, the BoE's decision next week will be a key moment for UK households and investors alike.
