Markets stick to view Bank of England rate hike a long way off

LONDON, Feb 4 (Reuters) - Financial markets stuck on Thursday to their view it might be a couple of years until the Bank of England hikes interest rates despite Governor Mark Carney saying this would make it overshoot its inflation target.

British government bond prices bounced around as the BoE cut its growth forecast and predicted lower inflation for 2016 after leaving interest rates on hold again, with the lone advocate of a rate hike reversing his position.

But overall gilt yields rose strongly, reflecting a surge in oil prices that also sent euro zone government bond yields sharply higher.

Market pricing for the first BoE rate hike still pointed to a lift-off date of around mid-2018, with a small chance of a cut by next year. Short sterling futures stood little changed compared with their level before the central bank published its quarterly inflation report.

The BoE retained its forecast that based on the market's view on rates, inflation would overshoot its 2 percent target in a couple of years - ordinarily an indication that it thinks rate bets in the market have been pushed back too far.

"I'm not sure the market's terribly bothered by that, to be honest," Jason Simpson, rates strategist at SocGen (Paris: FR0000130809 - news) , said.

"Given all the (uncertainty) out there, I think the market is trusting its own judgement rather than looking at the Bank's 2-year forecast for inflation."

The 10-year gilt yield was last up 4 basis points on the day at 1.57 percent, after striking a 10-month low of 1.488 percent on Wednesday. The premium the bond offered over the equivalent German Bund widened by around 2.5 basis points to 126.5 basis points.

March long gilt future 120.35 (-0.54)

June 2016 short sterling 99.43 (-0.01)

Dec 2016 short sterling 99.42 (-0.01)

10-year gilt yield 1.57 pct (+4 bps)

-------------------KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S (Other OTC: UBGXF - news) . Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO (Reporting by Andy Bruce; Editing by Tom Heneghan)