By Grellan McGrath and Robin Windle of the Bank's Sterling Markets Division.
Sterling inflation-linked markets have developed rapidly over recent years, both in size and complexity. These changes have been driven by increased demand, especially from institutional investors such as pension funds, which has stimulated new supply as well as the rapid development of the market for inflation swaps. This article surveys these developments and considers their implications, in particular for the way risk is transferred between market participants and the interpretation of observed market rates. Market contacts suggest the increases in activity and the number of participants have enhanced efficiency in these markets, although the timing of demand and supply flows can still influence observed market prices. Looking ahead, there are considerable uncertainties as to the size of future demand and supply in the market.