Investing.com – U.K. government bonds, known as gilts, rallied on Wednesday after U.K. inflation came in below expectations in December, offering respite to Chancellor Rachel Reeves and potentially giving the Bank of England a chance to cut interest rates when meet next time.
At 07:15 ET (12:15 GMT), the yield on the UK’s benchmark 10-year government bond fell 4 basis points to 4.85%, after hitting a 16-year high earlier this week.
Yields and prices move inversely in government bonds.
The annualized rate fell to 2.5% in December, from 2.6% in the previous month, while the core CPI, which excludes volatile energy and food prices, fell to 3.2% annually, from 3.5% in the previous month.
“The weaker-than-expected core print was driven by a negative surprise in services inflation,” UBS analysts said, and “adds to a set of soft data confirming our call for a 25bp rate cut at the next meeting on February 6.”
Goldman Sachs agreed, saying that “the slowdown in core measures of services inflation reinforces our view that the Board is likely to cut the bank rate in February.”
The figures will come as some relief to the Bank of England, as anything higher would provide the perfect excuse for speculators to continue selling UK government debt, where yields have jumped on concerns about Britain’s fiscal health under Chancellor Rachel Reeves.
British government bond yields have risen steadily since September, reflecting subdued expectations of a Bank of England rate cut, additional borrowing in the new government’s Oct. 30 budget and higher U.S. Treasury yields as President-elect Donald Trump is expected to pursue loose fiscal policy and raise tariffs.
These higher yields are likely to cause headaches for Reeves, as the added cost of servicing the country’s debt could mean he exceeds his medium-term borrowing targets when he updates his forecasts on March 26.
