slowed to 7.9% in June from 8.7% in May, a bigger drop than almost all the economists polled by Reuters had expected. Core and services inflation - closely watched by the BoE - cooled too.Before Wednesday's data, investors had assigned a roughly 60% chance that the BoE would hike rates on Aug. 3 by a half-percentage point. That turned into aThe predicted peak for Bank Rate was no longer priced in at 6% with the overnight index swap curve showing just as much chance of a 5.75% peak.
"June's inflation data will make welcome reading for gilts and the BoE alike," Michael Metcalfe, head of macro strategy at State Street Global Markets, said. "But after upside surprises totalling a not-so-cool 1.5% in the past four-months, it will take more than just one month's data to calm rate markets."
The two-year yield was down 27 basis points on the day at 1108 GMT - on track for the biggest daily drop since March 13, when bonds surged after the collapse of Silicon Valley Bank. The yield fell as low as 4.800%, its lowest since June 15.The gap between 10-year gilt and German Bund yields - which had widened sharply in recent months to reflect Britain's more acute inflation problem - narrowed to 185 bps from 199 bps on Tuesday its lowest level in over a month.