In This Article:
(Bloomberg) -- UK government bonds rallied as data showing Britain’s inflation fell in December eased fears over persistent price pressures that have rattled the nation’s assets this year.
Most Read from Bloomberg
The yield on 10-year gilts fell 16 basis points, the most since 2023, to 4.74%. The gains were compounded by a lower-than-forecast US inflation print.
Traders rushed to price more interest-rate cuts from the Bank of England this year following the reports, betting on 54 basis points of reductions — meaning two quarter-point moves are fully priced. That compares to fewer than 40 basis points on Tuesday.
The moves pare a rise in yields that’s seen UK borrowing costs hit multi-decade highs and fueled concerns about the Labour government’s fiscal plans.
“After a difficult start to the year, this morning’s inflation print will provide some relief to Chancellor Reeves,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management. “We are not out of the woods yet, however, and the inflation dynamics could prove challenging this year.”
UK services inflation, watched closely by BOE officials, fell to 4.4% in December from 5% the previous month, a significantly larger drop than economists’ 4.8% forecast. Consumer price growth decelerated slightly to 2.5% from 2.6%, compared to the unchanged reading expected by economists.
UK’s Unexpected Inflation Slowdown Provides Respite for Reeves
While the pound initially slipped following the report as traders bet lower rates would dim its attractiveness, that move proved short-lived amid broad dollar weakness. The reversal also reflected a broader reappraisal of the UK outlook, given much of the currency’s recent weakness reflected a difficult mix of sticky price pressures and dim economic growth prospects. The pound was 0.6% higher at $1.2287 as of 1:54 p.m. in London.
“While weaker inflation typically weighs on a currency, these are not normal times for UK assets,” said Kathleen Brooks, research director at XTB. “The pound may stage a short-term relief rally on the back of this report because some of the upward pressure on yields has been driven by fears about stagflation.”
Still, the challenges for Chancellor Rachel Reeves remain in place as highlighted by a 10-year bond sale on Wednesday where the borrowing cost of 4.81% was the highest since 2008.
The Debt Management Office’s sale of £4 billion ($4.9 billion) 10-year gilts saw yields jump some 48 basis points since the previous sale last month, reflecting the move higher in rates in secondary trading. The auction was oversubscribed 2.8 times, the lowest for that tenor since December 2023.