Investing.com - UK government bonds, known as gilts, have rallied Wednesday, after UK inflation was reported below expectations in December, offering respite to Chancellor Rachel Reeves and potentially offering the Bank of England opportunity to cut interest rates when it next meets.
At 07:15 ET (12:15 GMT), the yield on the benchmark 10-year UK government bond fell 4 basis points to 4.85%, having soared to a 16-year high earlier this week.
Yields and prices move inversely in government bonds.
Annual consumer price inflation fell to 2.5% in December, down from 2.6% in the prior month, while core CPI, which excludes volatile energy and food prices, fell to 3.2% annually, from 3.5% in the prior month.
“The weaker-than-expected core print was driven by a downside surprise in services inflation,” said analysts at UBS, and “adds to a set of soft data reinforcing our call for a 25bp rate cut at the next meeting on 6 February.”
Goldman Sachs agreed, saying “the deceleration in underlying services inflation measures reinforces our view that the Committee is likely to cut Bank Rate in February.”
These figures will come as something of a relief for the Bank of England, as anything higher would have offered the perfect excuse for speculators to continue selling UK government debt, where yields have soared amid worries about Britain’s fiscal health under the leadership of Chancellor Rachel Reeves.
British government bond yields have climbed steadily since September, reflecting reduced expectations of Bank of England rate cuts, extra borrowing in the new government’s Oct. 30 budget and higher US Treasury yields as President-elect Donald Trump is expected to pursue a loose fiscal policy and raise tariffs.
These higher yields are likely providing headaches for Reeves, as the additional cost of servicing the country’s debt may mean she overshoots her medium-term borrowing targets when she updates the forecasts on March 26.