The BoE said inflation was likely to remain close to its 2% target during the next two years. The Bank surprised the market by raising its central projection for GDP growth in the near term. The Bank’s central forecast is for the year on year growth rate to edge above 3% by the end of 2006 and to stay at this level for most of 2007.

Over in the States, Ben Bernanke who took over from Alan Greenspan this month as Chairman of the Fed gave his eagerly awaited testimony before congress yesterday afternoon. His testimony was relatively upbeat, “some further firming of monetary policy may be necessary” and was consistent with continued market speculation of a Fed rate hike at the March FOMC meeting.

He also emphasized the degree of monetary tightening that has already been achieved and discussed risks to growth. The implications are that volatility in the interest rate market is likely to be very high should economic data slow in the time leading up to the next FOMC meeting.

Treasury International Capital Data (TICS) came in at a worse than expected USD 56.6 billion for December from USD 91.6 billion in November. The decline was primarily due to less private purchases of Treasuries. Foreigners purchased USD18.3bln in US Treasuries in the last month, down from the strong USD54.5bln result in November. Purchases of other asset classes were barely changed on the previous month.

Overnight the UK RICS housing market survey was released, this rose +9 in January from +8 in December which was the highest rise since June 04 and the third month in a row of improvement in UK house prices.