UK government borrowing costs drop handing Rachel Reeves multi billion pound boost for November budget

The UK government’s borrowing costs have hit an 11 month low, offering Chancellor Rachel Reeves a welcome windfall just weeks before the autumn budget. Yields on 10 year government bonds, often viewed as the benchmark for official debt servicing costs, fell to 4.38 per cent this week. This marks the lowest rate since December 2024, as unexpectedly subdued inflation figures have driven expectations of further interest rate cuts in 2026.

Investor demand for gilts surged following September inflation’s steady performance, with consumer price inflation holding at 3.8 per cent rather than rising to the widely predicted 4 per cent. Investors’ buying pressure has helped push bond prices higher and yields down, translating into lower government borrowing costs. Analysts indicate even a one percentage point reduction in average long term yields over the official 10 day calculation period could save the Treasury roughly £12 billion in debt servicing, with some forecasts placing the likely saving near £4.5 billion using present market rates.

This sustained rally in the gilt market serves as a much needed advantage as the Office for Budget Responsibility closes its fiscal forecasting window ahead of the budget slated for 26 November. Past budgets often saw the government penalised by high borrowing cost projections, but current market conditions could reverse that pattern for Reeves’s financial plans. Meanwhile, the prospect of more interest rate reductions in 2026 has traders betting on an imminent shift in monetary policy, even as inflation looks set to fall further in the coming year.

The strengthening in bond markets coincided with a slide in sterling, which dropped to €1.14 against the euro and $1.34 versus the dollar, providing an additional lift to FTSE 100 equities that touched record levels on Wednesday. Analysts from Pimco and Deutsche Bank highlight the significance of this inflation surprise, which has aided a dovish shift in the rates market for the first time in nearly two years. The consensus from leading economists is that inflation may decline towards 3.6 per cent by year end and approach 2.3 per cent in the fourth quarter of next year, just above the Bank of England’s 2 per cent target.

The base interest rate in the UK remains at 4 per cent, outpacing the eurozone’s 2 per cent and tracking the United States’ 4.00–4.25 per cent. While the Bank of England is not expected to cut rates in the immediate term, markets are keenly awaiting fiscal developments from the budget before the Bank’s next and final meeting of 2025 in December.

This period of falling yields and stable inflation provides the government with considerable room to manoeuvre as budget season approaches. The outcome is poised to shape not only Chancellor Reeves’s spending and investment decisions but also the wider outlook for the British economy through 2026.