Borrowing costs for the UK government have fallen, as an unexpected drop in inflation at home and in the US bet central banks will cut interest rates in the coming months.
The yield – or interest rate – charged on key UK government debt fell below 4.8 per cent, pulling back from last week’s rise, when it hit a 16-year high.
These steps were followed by new data. Inflation cooled to 2.5 percent in December, from 2.6 percent in the previous month.
That has eased pressure on Chancellor Rachel Reeves, whose budget policies have been criticized for contributing to market turmoil.
UK bond yields hit their highest level since 2008 last week, As concerns grow over the UK’s economic outlook and rising borrowing costs.
The yield on 10-year gilts, as bonds issued by the UK government are known, was approaching 4.9 percent, reflecting investor anxiety.
But government data on Wednesday, which showed inflation falling for the first time in three months, helped calm the market somewhat.
Analysts said easing inflation would give the Bank of England more room to consider additional rate cuts to support the economy.
Investors on Wednesday raised bets on the possibility of an interest rate cut next month and are backing a second cut by the end of the year.
Bets on lower borrowing costs were also bolstered by inflation news from the U.S., where data suggested the underlying rate of inflation was slowing.
The Labor Department’s monthly report showed headline inflation rose to 2.9 percent in December from 2.7 percent.
But markets focused on so-called core inflation, which includes volatile food and energy costs and is seen as a better indicator of trends.
The metric unexpectedly fell from 3.3% to 3.2%, raising hopes that the U.S. central bank will cut interest rates in the coming months.
Share prices rose and U.S. yields fell, a move that was quickly transmitted to global bond markets, where borrowing costs were rising in response to the stimulus in the U.S.
Apart from the UK, Germany was among the countries where government debt yields fell. The pound also rose to around $1.22 in reaction to the news.
However, Susannah Streeter, head of money and markets at Hargreaves Lansdown, warned that despite today’s relief, borrowing costs remain high for the UK.
“Government borrowing costs are beginning to trend downward, with yields on 10-year gilts falling, but still above 4.8%, multi-decade highs, as investors adjust to the UK’s debt burden,” he said. I guess.”