Gilts edge lower as investors focus on central bank inflation report

LONDON: Gilts fell modestly on Tuesday in line with German Bunds after lower-than-expected inflation data left the market unmoved and investors awaited new Bank of England economic forecasts due out on Wednesday.

Britain's inflation rate held steady at 2.7 percent for the fourth consecutive month, the Office for National Statistics said, the highest level since May but slightly below the 2.8 percent forecast in a Reuters poll.

The March gilt future settled 11 ticks lower at 116.15, while the equivalent German Bund future settled 30 ticks lower at 142.55.

"Essentially we've been tracking Bunds lower. We've been outperforming a little bit but not hugely. The market has been trading broadly speaking more softly since the US came in, but there is very little happening at the moment," said Barclay strategist Moyeen Islam.

In its Inflation Report on Wednesday, when the Bank of England will update its forecasts for the UK economy for the next three years and Governor Mervyn King will hold a news conference.

Economists are keen to see how King reconciles a sluggish economic outlook - that might potentially benefit from more bond purchases - with a sticky picture for inflation that is likely to stay above the bank's 2 percent target for longer than hoped.

"Tomorrow I think will be quite a subdued inflation report for the Bank of England," said Islam. "They will acknowledge that inflation remains high, but they remain firmly fixed on the growth side of things."

Last week the Bank of England said inflation might exceed 2 percent for the next two years, prompting some analysts to expect an upward revision to its inflation forecast, which in November was for below-target inflation from the third quarter of 2014.

As well as reducing the prospective real return on gilts, a higher inflation forecast would also raise the barrier to the bank restarting its bond purchase programme something most economists already see as unlikely.

Ten-year gilt yields were broadly steady at 2.11 percent, while their spread versus Bunds was 1.5 basis points tighter at 47 basis points.