LONDON: Sterling rose while long gilt futures fell on Thursday after a Bank of England quarterly report said inflation would return to its target of 2 percent in two years time, keeping alive expectations of a first rate hike in early 2016.
Investors are factoring in the chance of a first hike in about 11 months time, compared with 12 months before the report was released, based on the overnight sterling overnight interbank average rates.
BoE Governor Mark Carney said he expected inflation to fall below zero in the coming months due to tumbling oil prices, but stressed that this by itself did not mean the economy had entered deflation.
In fact, the central bank revised up its growth forecasts and predicted wages would grow faster. Looking beyond the impact of falling oil prices in the short term, the BoE forecast inflation will climb steadily to its 2 percent target in two years' time, and a fraction above that in three years.
Sterling hit the day's high of $1.5293 from $1.5226 beforehand, while against the euro, sterling rose to 74.13 pence from around 74.47 before the report was released.
Long gilt futures fell around 20 basis points, but pared losses shortly afterwards. They were last down 12 ticks on the day at 120.40.
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