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Gilt market ponders consequences of MPC inaction

The continued low level of 2-year gilt yields suggests that the gilt market believes the Bank of England will keep interest rates at +0.10% for a long time yet. But the increase in gilt yields of maturities of more than 5 years suggests that the markets believe the consequence will be higher inflation and a bigger increase in interest rates further ahead. As the near-term outlook for Bank Rate appears to be anchoring 10-year gilt yields by less than we thought, the risks to our forecast that 10-year yields will end next year at 1.00% are increasingly on the upside.

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