UK gilts remain narrowly mixed ahead of BoE’s monetary policy meeting, Inflation Report

The UK gilts traded narrowly mixed Thursday as investors await the Bank of England’s (BoE) monetary policy decision, scheduled to be unveiled today by 12:00GMT and the central bank’s Inflation Report, due at the same time for detailed insight into the bond market.

The yield on the benchmark 10-year gilts, rose 1/2 basis point to 1.55 percent, the super-long 30-year bond yields remained tad higher at 1.97 percent and the yield on the short-term 2-year too slightly up at 0.63 percent by 10:05GMT.

All eyes today will be on the BoE as it makes its first monetary policy announcement of the year and also publishes its latest Inflation Report. No change to the policy decision is expected, and also expect the MPC to repeat its recent forward guidance, i.e. that it anticipates that further tightening in monetary policy will be required if the economy continues to develop in line with its expectations – and by extension – that another two to three rate hikes might be expected over the next two or three years. But investors should certainly watch for any hints of possible tightening over the near term, which might be reflected in the BoE’s updated economic forecasts.

As usual, the main guide to future BoE policy changes will be provided by its inflation forecast. While we saw a decline of 0.1ppt in CPI in December to 3.0 percent y/y, inflation over coming months is likely to be supported by significantly higher fuel prices than the BoE previously expected. As a result, and despite sterling’s recent strength, the BoE might revise up its near-term CPI forecasts.

If the BoE maps out such a profile that should suggest no need to tighten again for a while yet. Nevertheless, despite signs of a soft start to Q1, the BoE’s GDP growth forecasts are likely to be revised up, reflecting revisions to past GDP outturns, the higher-than-expected reading for Q4 2017 (0.5 percent q/q), and stronger economic momentum abroad. The extra color on the monetary policy outlook might also be provided by the BoE Governor’s letter to the Chancellor, which he has been compelled to write after the headline CPI rate rose above the BoE’s target by more than 1.0ppt last quarter, Daiwa Capital Markets reported.

Meanwhile, the FTSE 100 traded 0.83 percent lower at 7,219.50 by 10:10 GMT, while at 10:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at 53.69 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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