LONDON – UK borrowing costs fell sharply on Wednesday, following the release of lower-than-expected consumer inflation prints both at home and in the US
Yield on 10-year UK government bonds it was 16 basis points lower at 4.727% at 4pm in London, putting it on track for its first daily decline since December 31. A sharp rise since the start of the year on concerns about the country’s growth outlook and debt burden has taken the benchmark yield to its highest level since 2008.
Yield on 2 years UK bonds, known as gilts, fell 15 basis points to 4.45%. Long date yield 30-year bonds it fell 15 basis points from its highest level in 27 years.
Investors welcomed the release UK inflation data showing an annual increase of 2.5% in December, slightly less than the forecast of 2.6% among economists polled by Reuters. Closely watched services inflation fell to 4.4% from 5%, the lowest level since March 2022.
The press also boosted expectations that the Bank of England will cut interest rates in February, and was seen as a much-needed hint of good news for Finance Minister Rachel Reeves.
It’s Reeves struggling with economic stagnation and appears on the risk of violating self-imposed fiscal rules stipulating that all day-to-day government spending be fully financed by revenues, with the goal of reducing the country’s debt-to-GDP ratio. Monthly UK growth data for November is due on Thursday.
The bond market has moved slightly auction Mid-morning UK time 2034 bonds, which showed solid appetite for UK debt despite recent movements in the bond market, albeit with less demand than last year.
However, yields accelerated declines after the announcement US consumer price indexwhich helped ease concerns about a resurgence in inflation and also led to a sharp drop in US government bond yields. US headline CPI was in line with forecasts on an annual basis, but core inflation excluding food and energy was slightly lower than expected.
US Treasuries also saw a sell-off in 2025 as traders braced for a cautious rate cut by the Federal Reserve this year.
Gabriella Dickens, G7 economist at AXA Investment Managers, warned that the fall in UK headline inflation was likely to be short-lived as the drag on energy prices continued to ease.
“We don’t think this means the UK has an inherent inflation problem, as markets seem to have been concerned in recent months,” Dickens added.
“We see an increasing risk of inflation exceeding target over the medium term and think the Bank of England will continue to watch for near-term price pressures this year, as a result.”
