UK households' morale and rate hike expectations rise - IHS Markit

By David Milliken

LONDON (Reuters) - British households' financial worries have eased to their lowest since June, despite the prospect of higher Bank of England interest rates and a reliance on borrowing to make up for falling employment income, a survey showed on Monday.

The IHS Markit Household Finance Index rose to 43.8 in October from 42.8 in September, its highest since June, and marking a recovery from a third quarter which was the weakest since 2014.

Since its launch in 2009, the survey has never exceeded the 50 mark that would indicate an improved financial situation.

Markit said the survey's improvement this month reflected households' increased optimism about the economic outlook for the next year, as well as an increased willingness to spend on cars, holidays and household large goods.

However, despite increased workplace activity and a softening in inflation expectations, households reported a fall in income for the first time since January.

"The gap between rising spending and falling income may have been bridged with increased borrowing," the report said. "Latest data also suggested easier access to unsecured debt."

A separate survey by the EEF trade association and the bank Santander, also released on Monday, showed that investment had slowed this year but the proportion of manufacturers planning to invest more over the next two years had risen to 51 percent from 43 percent in 2016.

"With global demand on the up conditions should be ripe for industry to make new investments in capacity and productivity enhancing technology. But Brexit means the future outlook for investment is not clear cut," EEF economist Lee Hopley said.

The Bank of England is hoping solid consumer demand will keep the economy growing in the face of lacklustre investment.

BoE data has shown unsecured household borrowing growing at an annual rate of nearly 10 percent in recent months, down only slightly from an 11-year high reached last year.

Earlier this month, lenders told the BoE they planned to limit access to unsecured credit, after regulators raised concerns about sliding credit standards and urged banks to set aside more capital in case of future losses.

Monday's data is unlikely to dissuade the BoE from raising interest rates soon, after it surprised financial markets last month by saying it expected to raise interest rates in the next few months, if the economy grew as expected.

The Markit report - based on a poll of 1,500 Britons between Oct. 11 and Oct. 15 - showed the public are also revising their expectations for a rate rise.

Some 40 percent expect rates to rise in the next three months, up from 12 percent in September's survey, while 63 percent see a rate rise within six months.

(Editing by Andy Bruce)