The UK government’s borrowing costs fell as an unexpected fall in inflation at home and in the United States sparked bets that central banks would cut interest rates in coming months .
The yield – or interest rate – on the UK government’s main debts fell below 4.8%, falling after last week’s rise when it hit a 16-year high .
These moves followed new figures showing inflation slowed to 2.5% in December, from 2.6% the previous month.
That eased pressure on Chancellor Rachel Reeves, whose fiscal policies have been criticized for contributing to market turmoil.
UK bond yields hit their highest levels since 2008 last week, as concerns over the UK’s economic outlook and rising borrowing costs grew.
The yield on 10-year gilts, as the bonds issued by the British government are known, was approaching 4.9%, reflecting investor unease.
But government data released Wednesday, which showed inflation falling for the first time in three months, seemed to help calm the market somewhat.
Analysts said moderating inflation would give the Bank of England more room to consider further rate cuts to support the economy.
Investors on Wednesday increased their bets on the likelihood of an interest rate cut next month and support a second cut by the end of this year.
Bets on lower borrowing costs were also bolstered by inflation news from the United States, where data suggested the underlying pace of price rises was easing.
The Labor Ministry’s monthly report shows that headline inflation rose to 2.9 percent in December from 2.7 percent.
But markets have focused on so-called core inflation, which excludes volatile food and energy costs and is considered a better indicator of trends.
This figure unexpectedly fell from 3.3% to 3.2%, raising hopes that the US central bank would cut interest rates in the coming months.
Stock prices surged and yields fell in the United States, moves that quickly spilled over into global bond markets, where borrowing costs rose in response to the momentum in the United States.
Germany is one of the countries, along with the United Kingdom, where public debt yields have fallen. The British pound also rose in response to the news, settling around $1.22.
However, Susannah Streeter, head of finance and markets at Hargreaves Lansdown, warned that borrowing costs for the UK remained high, despite today’s relief.
“Government borrowing costs have started to fall, with the yield on 10-year government bonds falling, but still above 4.8%, a multi-decade high, as investors assess the burden of British debt,” she said.
