LONDON — U.K. borrowing costs fell sharply on Wednesday, following the release of lower-than-expected consumer inflation prints both at home and in the U.S.
The yield on 10-year U.K. government bonds was 16 basis points lower at 4.727% at 4 p.m. in London, putting it on course for its first daily decline since Dec. 31. A surge since the start of the year on concerns over the country’s growth outlook and debt load had taken the benchmark yield to its highest level since 2008.
The yield on 2-year U.K. bonds, which are known as gilts, fell 15 basis points to 4.45%. The yield on long-dated 30-year bonds tumbled 15 basis points from its 27-year high.
Investors cheered the release of U.K. inflation data showing an annual increase of 2.5% in December, just shy of the forecast from economists polled by Reuters of 2.6%. Closely-watched services inflation dropped to 4.4% from 5%, its lowest level since March 2022.
The print both reinforced expectations for an interest rate cut by the Bank of England in February, and was seen as a much-needed glimmer of good news for Finance Minister Rachel Reeves.
Reeves is grappling with economic stagnation and appears at risk of breaching self-imposed fiscal rules stipulating that all day-to-day government spending is fully funded via revenues, with a goal of reducing the country’s debt to GDP ratio. Monthly U.K. growth data for November is due Thursday.
The bond market was little-moved by an auction mid-morning U.K. time of 2034 bonds, which showed solid appetite for U.K. debt despite the recent bond market moves, though with lower demand than seen last year.
However, yields accelerated declines after the release of the U.S. consumer price index, which helped ease concerns about a resurgence in inflation and also drove U.S. Treasury yields sharply lower. U.S. headline CPI was in-line with forecasts on an annual basis, but core inflation excluding food and energy was slightly lower than expected.
U.S. Treasurys have also experienced a sell-off in 2025 as traders gear up for a cautious pace of interest rate cuts from the Federal Reserve this year.
Gabriella Dickens, G7 economist at AXA Investment Managers, cautioned that a decline in headline inflation in the U.K. would likely be short-lived as the drag from energy prices continues to ease.
“We don’t think this means the U.K. has an inherent inflation problem, as markets have seemingly been concerned about in recent months,” Dickens added.
“We see a growing risk that inflation will undershoot the target over the medium term and think the Bank of England will continue to look through near-term price pressures this year, as a result.”