Borrowing costs fall after inflation surprise
The UK government’s borrowing costs fell as an unexpected decline in domestic and US inflation increased speculation that central banks would cut interest rates in the coming months.
The yield – or interest rate – charged on UK government key debt fell below 4.8%, retreating after last week’s rise when it reached its highest level in 16 years.
These steps were taken after showing new figures Inflation declined to 2.5% in December, from 2.6% in the previous month.
That eases pressure on Chancellor Rachel Reeves, whose budget policies have been criticized for contributing to the market turmoil.
Last week UK bond yields reached their highest level since 2008. Concerns increased over Britain’s economic outlook and rising borrowing costs.
As is known, the yield on 10-year gilts on bonds issued by the UK government was approaching 4.9%, indicating investors’ uneasiness.
But government data on Wednesday, which showed inflation falling for the first time in three months, appeared to help calm the market somewhat.
Analysts said the easing of inflation would give the Bank of England more leeway to consider additional rate cuts to support the economy.
Investors on Wednesday stepped up 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 low borrowing costs were also boosted by inflation news coming from the US, where data showed the underlying pace of price growth was slowing.
The Labor Department’s monthly report shows overall inflation rose to 2.9% in December from 2.7%.
But markets focused on so-called core inflation, which excludes volatile food and energy costs and is seen as a better indicator of trends.
That metric unexpectedly fell to 3.2% from 3.3%, raising expectations that the U.S. central bank will cut interest rates in the coming months.
Stock prices jumped and US yields fell, which quickly spilled over into global bond markets, where borrowing costs were rising in response to the dynamics in the US.
Apart from Britain, Germany was among the countries where yields on government debt declined.
However, Susanna Streeter, head of currencies and markets at Hargreaves Lansdown, warned that despite today’s relief, borrowing costs remain high for the UK.
“Government borrowing costs are beginning to decline, with the yield on 10-year gilts falling but remaining at a multi-decade high above 4.8% as investors assess Britain’s debt burden,” he said. ”
