The prospect of additional interest rate cuts by the Bank of England has fuelled expectations that UK borrowing costs will fall further than previously forecast. The yield on 10-year UK government bonds has dropped to 4.34%, the lowest level since December 2024, as investors grew more confident in the country’s fiscal stability.
The decline in UK bond yields, which represent the interest rate paid on almost £3 trillion of government debt, is a significant boost for Chancellor Rachel Reeves. She fought hard within the government before November’s budget to increase the Treasury’s financial buffer and win over international investors who had become sceptical about the UK’s ability to balance its books.
Concerns before the budget had triggered a rise in UK bond yields to the highest level since 2008, underscoring the importance of the bond market to Reeves’ tax-raising statement. The Chancellor is now on track to reduce the spending deficit, which has consistently run above 5% since the pandemic, to below 2% by 2029-30.
European government bonds also fell on Wednesday, while borrowing costs remained steady in the US, where markets face uncertainty over the outlook for interest rates amid a standoff between former President Donald Trump and Federal Reserve Chair Jerome Powell.
The prospect of further interest rate cuts this year by the Bank of England has also fuelled bets that UK borrowing costs will fall further than previously estimated. The Bank cut interest rates by a quarter point to 3.75% in December, and markets are now betting on at least one more quarter-point reduction to 3.25% before 2027.
“UK bonds, known as gilts, are a preferred long for 2026,” said Jamie Searle, a strategist at Citigroup. “This reflects two main drivers: a greater scope for rate cuts and a more supportive issuance backdrop.”
Weaker employment and lower inflation are likely to encourage a majority of the nine-member Monetary Policy Committee (MPC) to lower interest rates further, according to MPC member Alan Taylor. In a speech in Singapore, he said: “Interest rates should continue on a downward path – that is if my outlook continues to match up with the data, as it has done over the past year.”
Inflation figures due next week could show a fall in December from November’s 3.2%, bringing it closer to the Bank’s 2% target, further bolstering the case for additional rate cuts.