UK companies are expecting inflation to be running at almost double the Bank of England’s target three years from now, a survey showed as traders ramped up bets on higher interest rates.

The worrying sign came even though companies are expecting to raise their own prices at the slowest pace since the war in Ukraine broke out.

On Thursday, traders fully priced in the BOE raising its key lending rate by a further one and a half percentage points to 6.5% after the central bank was forced to step up the pace of its hikes at its June meeting.

That would take rates to the highest since 1998, increasing the pain for homeowners, making loans more expensive for businesses and potentially pushing the economy into a significant recession.

Firms’ year-ahead expectations for overall inflation eased slightly to 5.7% in June from 5.9% in May, according to the BOE’s monthly Decision Maker Panel survey of chief financial officers. However, their three-year ahead expectations ticked up by 0.2 percentage point to 3.7% — well above the 2% target.

What Bloomberg Economics Says...

“Wobbly expectations lift the risk of inflation persistence and will keep another 50-basis-point move firmly on the table at the central bank’s August meeting. Still, it’s the upcoming jobs and CPI data that will prove decisive for the policy decision – our base case is that a stabilization in cost pressure will allow for a 25-bp hike.”

Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.

Firms expected to raise prices by 4.9% over the coming year, a slowdown from the 5.1% reported last month and the weakest pace pace since February last year when energy bills were sent soaring by Russia’s invasion of Ukraine.

The average expected price growth over the last three months slowed marginally to 5.3%, also the lowest figure since early last year.

There were mixed signs of pressures in the jobs market amid concerns of a wage-price spiral developing in the UK. While firms were less likely to report difficulties in hiring, year-ahead wage growth expectations edged up to 5.3% in June from 5.2% the previous month.

It came as BOE Governor Andrew Bailey said he still expects inflation to drop sharply after signs of stickier prices in recent data.

“It’s already started to come down and I expect quite a marked fall in inflation,” he said in an interview with CBBC aired on Thursday.

He said that inflation will get back to the BOE’s 2% target toward the end of next year but admitted that price growth is still “far too high.”