European government bonds were firmer as underlying price pressures in the 12-nation currency zone remained relatively subdued during July. The EU statistics office Eurostat confirmed its provisional estimate that headline inflation accelerated to 2.2 pct in July from 2.1 pct in June and added that core inflation remains well below the headline rate. Prices excluding energy, food, alcohol and tobacco were up 1.3 pct year-on-year in July, compared with a June increase of 1.4 pct. Prices excluding energy and unprocessed food rose 1.4 pct year-on-year, unchanged from the June increase. This measure of core inflation is closely watched by the European Central Bank. Analysts said the data make it even more likely that the ECB will keep its key refi rate unchanged at 2.00 pct for the rest of the year. "Despite euro zone inflation reaching a seven month high in July, the fall in core inflation to a four year low will help to allay concerns at the ECB," said Lucy Hartiss, international economist at Capital Economics. Overall, analysts said European issues appear to be well-supported, especially in the wake of yesterday's higher than expected US producer price data. "This argues for market risks today to be biased to the upside, at the margin," said WestLB analyst John Davies. Meanwhile, UK gilts recovered lost ground after yesterday's surprising news that the Bank of England's governor Mervyn King voted against the majority in this month's meeting of the rate-setting Monetary Policy Committee. King joined three other internal BoE officials in voting to keep the key repo rate unchanged at 4.75 pct at the Aug 4 meeting. That was the first time since the MPC was formed in 1997 that the governor was on the losing side in a vote. Furthermore, the 5-4 vote to cut rates a quarter point to 4.50 pct came as a major surprise to markets as most observers had been predicting a unanimous or near unanimous vote. Those opting for a reduction in August felt that the decision could be reversed in the coming months if warranted by upcoming data. As a result, the prospect of further cuts in interest rates in coming months receded further. Those expectations had already sharply diminished yesterday after official figures showed soaring oil prices pushed inflation above the BoE's target and to its highest level in eight years. Today's retail sales report for July cemented those views that interest rates are on hold for some time to come. Despite the impact of the London bombs on July 7 and 21, sales held up better than expected, falling by only 0.3 pct on a monthly basis against forecasts of a more pronounced 0.5 pct decline. "This supports the view that the MPC is unlikely to be cutting rates further in the foreseeable future," said UBS analyst Robyn Barnett. "This is consistent with our own view that interest rates remain on hold for the remainder of this year, before rising at some point in mid-2006," she added.