LONDON (Reuters) -Investors added to their bets on Bank of England interest rate cuts at the end of this year after data on Wednesday showed Britain's consumer price inflation and a key underlying
UK Gilt Yields Drop as Investors Anticipate Rate Cuts Following Stable Inflation
By Suban Abdulla
LONDON (Reuters) -Yields on British government bonds fell sharply across maturities on Wednesday as investors bet that unexpectedly steady inflation data will prompt the Bank of England to cut interest rates at the end of this year.
Yields on short-term UK government bonds hit their lowest since the run-up to finance minister Rachel Reeves' first budget in October 2024, when she announced significant extra borrowing to fund long-term investment.
Britain's annual inflation rate remained at 3.8% in September for the third month in a row - in contrast to market expectations of a rise to 4% - and underlying measures of price growth, closely watched by the BoE, also held steady.
Two-year gilt yields - 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 bps.
Five-year yields touched their lowest since October 1 at 3.831%.
Longer-term borrowing costs also fell, with 10-year yields hitting a 10-month low of 4.370% and 30-year yields falling nearly 10 basis points to 5.168%.
Interest rate futures were pricing a 78% chance that the BoE will cut its Bank Rate to 3.75% from 4% by its December meeting, up from about 46% before the inflation data. They were fully pricing in a 25 basis-point cut by February 2026, a month earlier than before the figures were published.
"We expect headline inflation to resume its descent, supported by ongoing cooling in labour demand – which may be happening faster than expected – and by the fiscal consolidation likely to be delivered in the Autumn Budget," analysts at BNP Paribas said in a note to clients.
"The extent of the downside surprise on Wednesday, and its implications for the path of inflation mean that a November rate cut cannot be written off entirely," they added.
Markets are now pricing in a 40% chance of a 25 bp cut by the BoE in November, and 65 bps of cuts by December 2026, compared with about 57 bps before the inflation data.
(Reporting by Suban Abdulla. Editing by David Milliken and Mark Potter)
