Easing Inflation Sparks Hope for Interest Rate Cuts in the UK

The UK's borrowing costs dropped sharply as inflation in the UK and U.S. signaled potential interest rate cuts, aiding British finance minister Rachel Reeves. Falling gilt yields were driven by UK price data and U.S. inflation figures, easing some pressure on the UK economy.

British government borrowing costs experienced a significant drop on Wednesday following key inflation readings from both the UK and the U.S., setting the stage for potential interest rate cuts. This development provided some relief to British finance minister Rachel Reeves, as softer-than-expected price growth figures for the UK led to a sharp decline in gilt yields.

The decline in borrowing costs gained momentum later in the day when U.S. inflation data also indicated decreasing pressure, a relief noted by Hetal Mehta, head of economic research at St. James's Place. British gilt yields had previously risen alongside global yields, partly due to anticipation of increased U.S. inflation under Donald Trump's impending presidency amidst an already robust U.S. economy.

The rapid increase in borrowing costs in Britain has been more pronounced compared to other regions, stemming from investor concerns over Reeves' borrowing plans, impending higher payroll taxes, and strong inflation pressures. However, financial markets are now predicting an 85% likelihood of a quarter-point rate cut at the BoE's next announcement. By the end of Wednesday, a further quarter-point cut by September was deemed certain.

(With inputs from agencies.)