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British government borrowing costs experienced their sharpest decline since 2023 on Wednesday, following better-than-expected inflation figures that helped alleviate market concerns about persistent price increases. The benchmark 10-year UK government bond yield dropped by nearly 20 basis points to 4.71 per cent, marking its most significant single-day decline in approximately two years.
The yield on the 30-year UK government bond, commonly known as a “gilt”, decreased by 17 basis points to 5.28 per cent. This development provided welcome relief for Chancellor Rachel Reeves, partially reversing the swift rise in UK government borrowing costs witnessed since the year’s beginning.
The Office for National Statistics reported that UK inflation declined to 2.5 per cent annually in December from 2.6 per cent, surpassing analysts’ expectations. Services inflation demonstrated a notable decrease to 4.4 per cent from 5 per cent in the previous month, significantly below the Bank of England’s forecast of 4.7 per cent.
Market responses were swift and positive, with the pound strengthening against major currencies. Sterling climbed 0.48 per cent against the dollar to $1.227 and gained 0.28 per cent against the euro to €1.18. The FTSE 100 demonstrated robust performance, rising by 1.05 per cent to 8,287.33.
The Bank of England’s Monetary Policy Committee, which maintained interest rates at 4.75 per cent in December, faces increasing pressure to consider rate cuts. Traders currently anticipate one or two quarter-point reductions this year, with the committee’s next meeting scheduled for 6 February.
The chancellor emphasised the government’s commitment to economic growth, stating that while progress has been made in managing inflation, work remains to support families dealing with cost-of-living pressures. The government’s actions include protecting working people’s payslips from higher taxes, maintaining the fuel duty freeze, and increasing the national minimum wage.
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