Unexpected drop in inflation lifts pressure off Rachel Reeves
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UK chancellor has had tough week but latest figure sends yield of UK government bonds tumbling. Rachel Reeves has been handed breathing space after better-than-expected inflation figures raised expectations for a Bank of England rate cut and reduced UK borrowing costs.
After a tough week for the government on the economy, official figures showed inflation unexpectedly cooled in December to 2.5%, down from 2.6% in the previous month, meaning prices rose at a slower rate. Lifting some of the pressure on the chancellor as she sought to talk up Labour’s growth agenda, the latest snapshot sent the yield – in effect the interest rate – on UK government bonds tumbling at the fastest rate since since 2023.
With 10-year gilt yields falling by almost 0.2 percentage points to about 4.7%, the sharp decline erased nearly all of the increase of the past seven days, when turmoil in the bond market had forced Reeves to contemplate spending cuts to meet her fiscal rules.
On a day of relief in global markets – after US figures showed cooling underlying inflationary pressures in the world’s largest economy – economists said the latest UK snapshot had raised the chances of the Bank of England cutting official interest rates when its policymakers next meet on 6 February.
With the economy on the brink of stagnation, a senior Bank policymaker warned on Wednesday that interest rates could need to be drastically reduced to avoid inflicting lasting damage on households and businesses. In a speech in Leeds Alan Taylor, who joined the Bank’s rate-setting panel last year, said a “more accelerated pace of rate cuts” than currently expected by the City could be needed to shore up the economy.
