Bank of England survey shows sharp rise in 2017 UK inflation expectations

A Bank of England (BoE) survey published on Friday showed that Britons expected to see higher inflation and interest rates in 2017. Slump in the value of sterling after Britain's vote to leave the European Union is seen as a likely boost to inflation. After the EU referendum in June, sterling fell as much as 20 percent against the U.S. dollar before recovering slightly.

The BoE in its latest inflation survey raised 1-year inflation expectations to 2.8 percent, from estimate of 2.2 percent in August, 2-year forecast to 2.5 percent, from an earlier forecast of 2.2 percent, 5-year forecast to 3.1 percent vs prior 3.0 percent. Additionally, the central bank increased 12-months rate rise expectations to 41 percent, from previous expectations of 21 percent.

The BoE said on Nov. 3 that it was no longer expecting to cut interest rates again during 2016 and it moved to a neutral stance about its next monetary policy move. A rise in inflation next year could weigh on households' spending power which may impact the British economy which has largely till now weathered the initial Brexit shock better than many expected.

The UK gilts witnessed a heavy sell-off on Friday as the BoE raised its expectations for inflation and interest rates. The yield on the benchmark 10-year gilts rose 6 basis points to 1.44 percent, the super-long 40-year bond yield climbed 5-1/2 basis points to 1.90 percent and the yield on short-term 2-year bounced 4 basis points to 0.14 percent by 10:30 GMT.