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BoE's Carney winning over public, if not markets, with rate pledge

Workers relax during the lunch hour outside the Bank of England in the City of London August 6, 2013. REUTERS/Toby Melville

By David Milliken and Christina Fincher

LONDON (Reuters) - Bank of England Governor Mark Carney appears to be winning over his target audience of the British public with his low interest rate pledge, if not financial markets.

A survey on Friday showed the number of people expecting interest rates to rise in the next year has fallen to its lowest since November 2008, even as traders increasingly bet that the economic recovery means rates could rise before the end of 2014.

"Carney has been very explicit about wanting to communicate with the public and the Bank will probably take encouragement from this," said Jens Larsen, economist with RBC in London.

Carney, who took over the BoE in July, believes that giving households and businesses a clear sense that interest rates will not rise for a long time gives them the confidence to spend and help the economy grow again.

Separate data on industrial output showed the recovery remained on track, but a marked deterioration in Britain's trade deficit dampened recent optimism that it was moving onto a more sustainable footing.

Last month, Carney said the bank did not plan to raise interest rates before unemployment fell to 7 percent - something he forecast would take until late 2016.

While financial markets doubt this timescale - and have brought forward their expectations for a first rate rise to as early as next December - a quarterly survey on Friday showed Carney was having more success with the public.

The proportion of Britons expecting a rate rise in the next 12 months sank to 29 percent in August from 34 percent in May, its lowest level since the height of the financial crisis.

November 2008 aside, there have only been two other occasions since the survey started in 1999 when fewer people expected an interest rate rise, both in 2001.

The survey of 2,050 Britons aged 16 and over was conducted by polling company GfK NOP between August 8 and August 13, just after the BoE announced its new policy.

Confidence that the BoE's rates will stay low is helping drive a sharp recovery in house prices which rose 5.4 percent in the three months to August from a year earlier, mortgage lender Halifax said on Friday.

The BoE's poll also showed a marked fall in how high people expect inflation to be over the coming years, with a range of average forecasts dropping to their lowest since August 2012.

That may reassure members of the BoE's Monetary Policy Committee such as Martin Weale who are concerned that the forward guidance policy could damage public confidence in the central bank's inflation-fighting commitment.

Signs of a surprisingly strong recovery in Britain's economy have come thick and fast in the past few months, pushing up interest rates in financial markets.

Growth of 0.7 percent in the second quarter could be trumped by a stronger reading in the July-September period.

However, data from the Office for National Statistics on Friday struck a less exuberant note. Industrial output was flat in July and Britain's total trade deficit topped 3 billion pounds ($4.7 billion), more than double its level in June.

Monthly trade figures are volatile but the widening of the trade deficit tempered expectations that Britain's economy might grow more than 1 percent in the third quarter.

"The early indications are therefore that net trade could be a significant drag on GDP in the third quarter after making positive contributions in both the second and first quarters," said Howard Archer, an economist with IHS Global Insight.

Exports to non-European Union countries plunged 16 percent in July from June, the biggest fall in more than four years, possibly reflecting the slowdown in some big emerging economies such as India.

Policymakers have stressed the need to rebalance Britain's economy away from domestic consumption and towards exports and investment, but progress has been slow despite a 25 percent drop in the value of sterling since late 2007.

($1 = 0.6415 British pounds)

(Additional reporting by Andy Bruce and William Schomberg)