Many UK consumers believe interest rates are on the rise, despite a sharp fall in inflation expectations for 2006, according to a survey from Lloyds TSB Financial Markets.

Across the UK, 61% of people believe that interest rates will rise this year, compared with just 11% expecting rates to fall. However, this view is against a backdrop of belief that prices in December 2005 had reduced significantly from the year before, implying a less inflationary outlook.

In December, 53% of consumers felt prices rose in 2005, compared with 44% who thought that prices had remained the same or reduced. However, this represents a significant improvement from the 64% who believed prices had risen in the November survey.

This fall in consumers’ views on inflation coincides with official data that shows the oil-induced price rises may have already peaked. Regarding price expectations, 70% of consumers surveyed believe that inflation in 2006 will be higher compared with just 6% expecting it to be lower. This is why there is still a majority expecting interest rates to rise.

When asked about job security and employment prospects, the picture has remained fairly steady when compared to November. However, there are still more people feeling pessimistic than optimistic about the labour market. Of the people surveyed, 20% feel more secure about their own job security than 12 months ago, but 24% feel less secure.

In addition only 17% think UK employment prospects are on the up, compared with 32% that believe the situation has got worse. Despite this, the picture is still brighter than November, defying the rising trend in official unemployment figures.

Trevor Williams, chief economist at Lloyds TSB Financial Markets, said: "December’s data shows that consumers are not expecting the interest rate cuts that are starting to be called for by some within the industry and increasingly expected by the financial markets."

"With the latest PMI figures showing service sector growth rising faster than expected, making a recovery in economic growth in 2006 more likely, they may be right."

"Calls for a rate cut now are somewhat premature and the next move in base rate is more likely to be a rate hike based on recent evidence from the housing market – but not until the second half of the year."