LONDON – Borrowing costs in the UK fell sharply on Wednesday following the release of lower-than-expected consumer inflation prints both at home and in the U.S.
Performance continues 10-year British government bonds was 16 basis points lower at 4.727% at 4 p.m. in London, marking the first daily decline since December 31. The reference point was a sharp increase since the beginning of the year resulting from concerns about the country's economic growth prospects and the debt burden – profitability reached the highest level since 2008.
Performance continues 2 years old British bonds, known as government bonds, fell 15 basis points to 4.45%. Profitability on long-term instruments 30-year bonds down 15 basis points from a 27-year high.
Investors welcomed the publication UK inflation data showing annual growth of 2.5% in December, just below the 2.6% forecast of economists polled by Reuters. Closely watched services inflation fell to 4.4% from 5%, the lowest level since March 2022.
The print both reinforced expectations for a Bank of England rate cut in February and was seen as a much-needed glimmer of good news for Finance Minister Rachel Reeves.
Reeves is struggling with economic stagnation and appears at risk of violating self-imposed fiscal rules stipulating that all day-to-day government spending is fully financed by revenues, with the goal of reducing the country's debt-to-GDP ratio. Monthly UK economic growth data for November will be published on Thursday.
There was little change on the bond market, including: auction noon UK time for 2034 bonds, which showed strong appetite for UK debt despite recent bond market moves, although with lower demand than last year.
However, yields accelerated declines after the announcement was published US Consumer Price Indexwhich helped ease concerns about inflation rising again, as well caused a sharp decline in the yield of US treasury bonds. CPI inflation in the US was in line with forecasts on an annual basis, but core inflation excluding food and energy prices was slightly lower than expected.
U.S. Treasuries also saw a sell-off in 2025 as investors brace for the Federal Reserve's cautious pace of interest rate cuts this year.
Gabriella Dickens, G7 economist at AXA Investment Managers, warned that the decline in headline inflation in the UK was likely to be short-lived as the impact of energy prices on inflation continued to weaken.
“We don't think this means the UK has an inherent problem with inflation, which is something that markets have clearly been concerned about in recent months,” Dickens added.
“We see an increasing risk that inflation falls below target over the medium term and believe the Bank of England will continue to review short-term price pressures as a result.”