The rally in gilts came as German government bonds slid following a poorly received Bund auction and reports about the European Central Bank's plans to buy billions of euros of bonds a month to head off deflation.
The yield premium which 10-year gilts
"It's an unusual day when gilts and Bunds have moved in polar oppositive directions," said RBS fixed income strategist Simon Peck.
The last time there was such a sharp one-day fall was in November 2011, when there were fears that the euro zone itself could fall apart due to debt problems on its periphery.
Five-year gilts
Ten-year gilt yields dropped 3 basis points on the day to 1.50 percent, after briefly hitting its lowest since August 2012 at 1.457 percent.
By contrast, 10-year Bund yields rose 8 basis points as markets bet that an unprecedented ECB bond purchasing programme, which they expect to be announced on Thursday, would succeed in boosting inflation in the bloc.
Ten-year gilts also outperformed U.S. Treasury bonds
Only one of 24 economists polled by Reuters had expected BoE policymakers Martin Weale and Ian McCafferty to drop their calls for a rate rise this month, despite a fall in British inflation in December to a 14-year low of 0.5 percent.
Both men cited the risk of low inflation becoming entrenched if rates rose now, and the BoE said it saw a "roughly even" chance of inflation falling below zero at some point in the first six months of 2015.
Short sterling rate futures <0#FSS:> rallied and financial markets pushed back their expectations for a first BoE rate rise to around June 2016. Just a few months ago, before oil prices plunged, a rate rise was priced in for February 2015.
However, the BoE said that if anything, the medium-term upward pressures on inflation might have increased, as lower mortgage rates and signs of higher wages increased households' spending power.
(Reporting by David Milliken; Editing by Alison Williams)
