Gilt yields leap after inflation hits 2013 high

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Demand for UK government debt has cooled this morning after figures show the British economy is experiencing its highest rate of inflation in three-and-a-half years.

Official stats this morning show annual inflation hit 2.3 per cent in February, exceeding expectations of a rise to 2.1 per cent and above the Bank of England’s target rate (2 per cent) for the first time since 2013.

Gilts have sold off in the wake of the news, with yields on 10-year debt jumping 6 basis points to a five-week high of 1.295 per cent.

Higher inflation eats into investor returns from fixed income assets such as bonds.

The pound meanwhile has strengthened, up 0.85 per cent against the dollar on the day, as above-target inflation raises the possibility of a Bank of England interest rate rise.

The BoE has been in “neutral” mode on monetary policy since the start of the year having cut its base rate to a record low of 0.25 per cent following the Brexit vote last summer. Still, it has insisted it is willing to look through temporary inflationary spikes as it forecasts average consumer prices to end above target this year.

Chart via Bloomberg

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