Extending the horizon over which inflation returns to target is a policy that has also been proposed by BoE governor-in-waiting Mark Carney. The upward revision in inflation was driven mainly by sterling weakness and a more robust outlook for energy prices.
Economic growth forecasts were simultaneously revised down to 1.3 per cent for the fourth quarter of 2012 compared with 1.7 per cent in November. This combination seems like a perfectly valid reason for investors to demand a higher yield for holding gilts.
The budget deficit is anticipated to be 6.9 per cent of GDP in 2013/14, and is now expected to be 2 per cent wider than previously forecast in 2016/17, with net debt now not expected to peak until 2015/16 (at close to 80 per cent of GDP).
With safe haven and liquidity preference set to further diminish as supportive factors for gilts, higher-yielding assets look likely to attract fund flows from gilts. The yield gap on the FTSE v the yield on five-year gilts is wide relative to history and – in an improving global risk environment – this is likely to prove increasingly attractive.
Philip Poole is global head of macro and investment strategy at HSBC Global Asset Management
