The Bank of England’s Inflation Report was marginally doveish. Growth forecasts were revised lower significantly acrossthe forecast period (2.5% from 2.9% in 2015, 2.6% from 2.9% in 2016) but near-term inflation outlook revisedhigher to 0.6% for 2015 as a result of rise in oil prices. Medium-term inflation outlook is broadly unchanged. The short-sterling curve bull-flattened after the release of the report with back-end 2016 contracts ~4bps lower. BoE Governor Carney said GBP strength is relevant for the projected path of UK interest rates (causing a 20 pip drop in GBP), that wage developments relative to productivity and GBP strength are the biggest factors for the inflation outlook and that we can expect further pass-through of GBP strength into the UK economy after its recent rally.
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