Short-term UK government bond yields hit their lowest levels since the run-up to Secretary of State Rachel Reeves’ first budget in October 2024, when she announced significant additional borrowing to fund long-term investments.
UK annual inflation remained at 3.8% for the third month in a row in September – contrary to market expectations of a rise to 4% – and underlying measures of price growth, closely watched by the BoE, also remained stable.
Yields on two-year government bonds – which are particularly sensitive to interest rate expectations – fell as much as 11 basis points to 3.739%, the lowest since August 23, 2024, and were last down 7 basis points.
The five-year interest rate reached the lowest level since October 1, namely 3.831%.
Longer-term borrowing costs also fell, with the 10-year rate hitting a 10-month low of 4.370% and the 30-year rate falling nearly 10 basis points to 5.168%. Interest rate futures estimate a 78% chance that the BoE will cut bank rates from 4% to 3.75% before the December meeting, compared with around 46% before the inflation data. They had fully priced in a 25 basis point cut by February 2026, a month earlier than before the numbers were released. “We expect headline inflation to return to a decline, supported by a continued cooling in labor demand – which may occur faster than expected – and by the fiscal consolidation likely to be achieved in the Fall Budget,” BNP Paribas analysts said in a note to clients.
“The size of Wednesday’s downside surprise and its implications for inflation developments mean that a November rate cut cannot be completely written off,” she added.
Markets are now pricing in a 40% chance of a 25 basis point cut by the BoE in November, and a 65 basis point cut in December 2026, compared to around 57 basis points before inflation figures.
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