(Bloomberg) -- UK inflation expectations fell to the lowest in three years, but the public is yet to be convinced interest-rate cuts are under way.

A Bank of England survey revealed more Britons still predict rates will increase instead of fall in the next 12 months in May. About a third of respondents expected borrowing costs to rise over the next 12 months, down from 36% in February. Those expecting rate cuts edged up to 27% from 26%.

That’s despite inflation expectations over the same period declining to 2.8%, the lowest reading since August 2021. The disconnect between the predicted paths for interest rates and prices indicates the BOE’s message about easing borrowing costs from their 16-year high is not cutting through with the public.

The BOE watches inflation expectations for evidence of persistent wage and price pressures. Policymakers have previously signaled a rate cut could be in the cards as early as this summer. Some economists see inflation falling back to the BOE’s 2% target for the first time in three years when May numbers are published next week. The following day, Governor Andrew Bailey and his colleagues are expected to leave rates unchanged as sticky services inflation and a general election on July 4 effectively killed potential plans for an early rate cut.

Investors have scaled back bets on how far the BOE will cut rates. Money markets are now pricing in around two reductions this year, and a further quarter-point cut by May 2024 to take the benchmark to 4.5%.

Recent figures showing the labor market is loosening add to hopes of receding inflationary pressures. UK unemployment rose to a two-year high while pay pressures eased, defying an upward pressure from an increase in the minimum wage. At the same time, the UK economy flattened in April in signs that high interest rates and the cost of living crisis continue to weigh on output. 

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