UK borrowing costs set for first daily fall in 2025

LONDON – UK borrowing costs fell sharply on Wednesday, following the release of lower-than-expected consumer inflation figures in both the country and the US.

The performance in 10-year UK government bonds was 16 basis points lower, at 4.727% at 4 pm in London, putting it on track for its first daily decline since December 31. A rise since the beginning of the year due to concerns about the country’s growth prospects and debt burden had weakened the benchmark index. its performance at its highest level since 2008.

The performance in 2 years UK bonds, known as gilts, fell 15 basis points to 4.45%. Long-term bond yields 30 year bonds fell 15 basis points from its 27-year high.

Investors applauded the publication of UK inflation data showing an annual increase of 2.5% in December, just below the forecast of economists polled by Reuters of 2.6%. Closely watched services inflation fell from 5% to 4.4%, its lowest level since March 2022.

The release reinforced expectations of 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 fighting economic stagnation and appears in risk of violating self-imposed tax rules stipulating that all daily public spending be financed entirely through revenues, with the aim of reducing the country’s debt-to-GDP ratio. Monthly UK growth data for November will be published on Thursday.

The bond market was little affected by a auction Mid-morning UK time for 2034 bonds, which showed strong appetite for UK debt despite recent bond market moves, albeit with lower demand than seen last year.

However, yields accelerated their declines after the publication of the US Consumer Price Indexwhich helped ease concerns about a resurgence of inflation and also sharply lowered US Treasury bond yields.. The US headline CPI was in line with forecasts on an annual basis, but core inflation excluding food and energy was slightly lower than expected.

US Treasuries have also seen a sell-off in 2025, as traders prepare for a cautious pace of interest rate cuts by the Federal Reserve this year.

Gabriella Dickens, G7 economist at AXA Investment Managers, warned that a drop in headline inflation in the UK would likely be short-lived as the drag on energy prices continues to ease.

“We don’t think this means the UK has an inherent inflation problem, as markets seem to have been concerned about in recent months,” Dickens added.

“We see a growing risk that inflation will miss target in the medium term and believe that, as a result, the Bank of England will continue to monitor near-term price pressures this year.”