UK borrowing costs have plummeted after a surprise drop in inflation, raising hopes that central banks will cut interest rates soon. The yield on key government debt dropped below 4.8%, its lowest level in 16 years. This follows new data showing inflation cooled to 2.5% in December, the first time in three months.
The move eases pressure on Chancellor Rachel Reeves’ Budget policies, which have been criticized for contributing to market turmoil. UK bond yields surged last week, reaching their highest levels since 2008, as investors worried about the economy’s outlook and rising borrowing costs.
However, the latest inflation data appears to have calmed markets somewhat. Analysts say this easing in inflation gives the Bank of England more leeway to consider additional rate cuts to support the economy. Investors are increasing bets on an interest rate cut next month and a second cut by the end of the year.
US inflation data also showed a slowdown, with core inflation falling unexpectedly from 3.3% to 3.2%. This has raised hopes for further interest rate cuts in the US and rippled through global bond markets, where borrowing costs had been rising due to dynamics in the US. The pound rose in reaction, standing around $1.22.
Despite this relief, experts warn that UK borrowing costs remain high, with the yield on 10-year gilts still above 4.8%. Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Government borrowing costs have begun to edge downwards, but it remains above 4.8%, at multi-decade highs as investors assess Britain’s debt burden.”
Source: https://www.bbc.com/news/articles/ce9n0xer288o