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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.
