UK Government Bonds Rally After Inflation Data

Investing.com – UK government bonds, known as gilts, rallied on Wednesday after December inflation figures came in below expectations. This offers some relief to Chancellor Rachel Reeves and may provide the Bank of England an opportunity to cut interest rates during its next meeting.

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 surged to a 16-year high earlier this week.

Yields and prices move inversely in government bonds.

Annual consumer price inflation dropped to 2.5% in December, down from 2.6% the previous month, while core CPI, excluding volatile energy and food prices, fell to 3.2% annually, from 3.5%.

Analysts at UBS stated, “The weaker-than-expected core print was driven by a downside surprise in services inflation,” which adds to a collection of soft data suggesting a 25bp rate cut at the next meeting on February 6.

Goldman Sachs also agreed, noting that the deceleration in underlying services inflation measures supports expectations that the Committee is likely to cut the Bank Rate in February.

These numbers are a relief for the Bank of England; anything higher would have provided reasons for speculators to continue selling UK government debt, causing yields to soar amid concerns about Britain’s fiscal health under Chancellor Reeves.

Since September, British government bond yields have increased steadily due to reduced expectations of rate cuts from the Bank of England, extra borrowing outlined in the new government’s October 30 budget, and rising US Treasury yields as President-elect Donald Trump possibly pursues a loose fiscal policy and raises tariffs.

These rising yields could present challenges for Reeves, as the increased cost of servicing the nation’s debt may lead her to exceed her medium-term borrowing targets when she updates forecasts on March 26.