Inflation has eased, sparking a drop in borrowing costs as UK government debt yields plunge below 4.8%.
Borrowing Costs Plunge After Inflation Surprise
The yield on key UK government debt has dropped below 4.8%, marking a significant decrease after last week’s surge when it reached its highest level in 16 years. The move follows new figures showing that inflation cooled to 2.5% in December, from 2.6% in the prior month.
Inflation Eases Pressure on Chancellor
The easing of inflation has eased pressure on Chancellor Rachel Reeves’ Budget policies, which have been criticized for contributing to market turmoil. UK bond yields soared to their highest levels since 2008 last week, as concerns over the UK’s economic outlook and rising borrowing costs spiked. However, the latest data suggests that investor unease is starting to dissipate.
US Inflation Data Supports Rate Cut Hopes
The ease in inflation has given the Bank of England more leeway to consider additional rate cuts to support the economy. Analysts say that the underlying pace of price increases is easing, and this news from the US has bolstered bets on lower borrowing costs. The monthly report from the Labor Department showed overall inflation rose to 2.9% in December, up from 2.7%. However, markets focused on core inflation, which excludes volatile food and energy costs, fell unexpectedly from 3.3% to 3.2%, raising hopes for an interest rate cut next month.
Global Market Reactions
Share prices jumped in response to the news, with yields in the US falling as a result. This move quickly rippled out to global bond markets, where borrowing costs had been rising in reaction to the dynamics in the US. Germany was among the countries where yields on government debt fell, and the pound also rose in reaction to the news.
Market Expert Warns of High Borrowing Costs
Despite today’s relief, market expert Susannah Streeter warns that borrowing costs for the UK remain high, despite the decrease in yields. “Government borrowing costs have begun to edge downwards, with the yield on 10-year gilts heading lower,” she said. “However, it remains above 4.8%, at multi-decade highs as investors assess Britain’s debt burden.
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