The UK government saw a significant drop in borrowing costs amid speculation of future interest rate cuts from central banks in the UK and US. The interest rate or yield charged on government debt fell to less than 4.8%, having been as high as the highest level in 16 years last week. The drop followed the publication of figures that revealed that inflation dropped to 2.5% in December, having been at 2.6% for the previous month. Government borrowing costs remain high, with the yield staying over 4.8%.
Last week, bond yields in the UK rose to their highest level since 2008. Government data published on Wednesday, showing a fall in inflation, helped to calm the market. While overall inflation rose to 2.9% in December in the US, up from 2.7%, core inflation fell from 3.3% to 3.2%, a drop significant enough to suggest that the US central bank might cut interest rates. This activity caused shares to rise, and yields in the US to fall. UK bond yields also saw online savings rates from other countries plummet.
Analysts suggested that the reduction in inflation would give the Bank of England the opportunity to consider additional rate cuts to support the UK economy. Investors increased their bets on a decline in interest rates in the coming months and anticipate a second cut by the end of the year. News of price increases easing in the US led to superior bets on lower borrowing costs.
Despite some relief in government debt drops, Susannah Streeter, who heads money and markets at Hargreaves Lansdown, emphasised that the rate of borrowing for the UK was still high. “Government borrowing costs have begun to edge downwards and head below 10-year gilts, but it remains above 4.8%, at multi-decade highs as investors assess Britain’s debt burden,” she said. The Chancellor, Rachel Reeves, is relieved by the news after critics complain that her budget policies contributed to the problems seen in the market
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