UK gilt yields drop on downward revision of inflation forecasts

The short duration and long duration UK gilt yields dropped after the Bank of England revised growth and inflation forecasts lower. 

The yield on the benchmark 10-yr Gilt yield fell more than 4 basis points [bps] to 1.195. The 2-yr yield, which is more sensitive to the short-term inflation and interest rate movements, fell close to 4bps to 0.241%. 

The drop in the yields is somewhat surprising, as the BoE said the interest rates could rise more than the markets currently imply. The bank now expects two rather than one rate hike over the forecast horizon. 

Still, the yields are under pressure. The action in the bond markets suggests the investors were expecting a more hawkish tone. The focus now shifts to Carney’s press conference. The yields may recover losses if the Governor hints at a year end rate hike.