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THOUGHTS ON THE GILT MARKET

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The UK gilt market has been bombarded with a number of different inflationary signals over the past week. On the on...
The UK gilt market has been bombarded with a number of different inflationary signals over the past week. On the one hand producer input prices tumbled to a ten year low in January, subduing producer output prices. On the other hand, retail prices continued to grow quite strongly in January, with RPI ex MIPs unchanged at 3.1%. Stronger service sector price inflation is offsetting weak goods price inflation preventing inflation from falling within its target range.

Last week also brought news that the gentle uptrend in wage inflation continued in the fourth quarter, with November's average earnings growth revised up to 4.5% in November, and staying there in December. With the labour market continuing to tighten, it is likely that wage growth will drift even higher.

Finally, the quarterly Bank of England Inflation report continued to warn about the prospects for domestic demand driven inflation, but appeared to concede that sterling's appreciation has had an effect on the economy, dampening down inflationary pressures.

Meanwhile today the gilt market was cheered by the publication of January's Public Sector Borrowing Requirement. There was an unexpectedly high debt repayment by the government, improving the prospects of the debt target for this year being achieved.

On balance, the gilt market is taking recent economic developments as good news, and the yield continues to fall.
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