UK gilts surge higher on dovish Inflation Report; European govt bonds up.

(From AFX UK (Focus))

LONDON (Thomson Financial) - UK gilts surged higher, reversing early losses as the Bank of England's dovish Inflation Report and press conference killed off any market expectations interest rates might rise in the near term to temper recent sharp rises in inflation.

Although the Inflation Report predicts that annual CPI inflation will hit 4.8 percent in the coming months, well above the BoE's 2.0 percent target and having hit 4.4 percent for July, it has signalled this will fall back towards target in the next two years if rates stay unchanged at 5.00 percent.

In addition, governor Mervyn King has said there is a real …