The UK’s borrowing costs have dropped to their lowest level this year, as financial markets cheered the surprise pause in inflation. Chancellor Rachel Reeves’ 10-year borrowing cost fell to 4.4pc, a level not seen since last December, as traders bet that the lower peak in inflation will allow the Bank of England to cut interest rates more quickly.
The drop comes after inflation remained locked at 3.8pc for the third month in a row. Official data published by the Office for National Statistics (ONS) showed that inflation remained stubbornly high at 3.8pc in September, unchanged from a month earlier. The figures mean the latest Consumer Prices Index is still at almost double the Bank of England’s target rate of 2pc. However, it is lower than the 4pc anticipated by markets.
City traders are now forecasting a small interest rate cut by the Bank of England in December to 3.75pc. The inflation figures prompted yields on government debt to fall. Yields on 30-year debt fell to 5.2pc – the lowest since June, reversing the worrying surge in long-term borrowing costs in August and September. Two-year bonds now trade at a rate of 3.76pc, the lowest since August of last year.
However, levels of inflation are still elevated, increasing the cost of servicing Britain’s £2.9 trillion of national debt, with interest payments on large portions of the borrowing tied to inflation.
