The cost of government borrowing fell after an unexpected fall in inflation

Higher-than-expected numbers ease pressure on Chancellor Jeremy Hunt ahead of the general election. Photo: James Manning/Pennsylvania.

Yields on two-year government bonds, known as securities, fell more than a quarter of a percent to 4.73% after official data confirmed inflation eased to 7.9% in June.

Inflation eased from 8.7% in May and came in below forecasts for a shallow drop in the consumer price index (CPI) to 8.2%.

Better-than-expected figures prompted investors to cut betting on future interest rate hikes. , which led to a decrease in government bond yields.

Two-year securities are most sensitive to the expectations of the Bank of England on interest rates. However, benchmark yields on 10-year bonds also slipped 0.16 percentage points to 4.13%.

Paul Dales, chief economist at Capital Economics in the UK, described the fall in prices as «quite significant», adding that the price move would «take some pressure off» on households as well as Chancellor Jeremy Hunt amid the upcoming general election.

The decline suggests that yields on securities have already passed their recent peak, and gives hope that mortgage rates may fall soon. Swap rates used to price fixed-rate mortgages fell after an inflationary surprise on Wednesday.

Mr Dales said: “If this is indeed a turning point for core CPI inflation, which we think it may be, then I think securities yields may have already peaked. And by the end of the year they will be much lower.”

UK borrowing costs have surpassed their mini-budget highs in recent weeks as traders have increased their bets on future interest rate hikes to control inflation. This provoked a new wave of price revisions for mortgage loans.

Mr Dales said: «The market has basically concluded over the past couple of months that the UK is the big global exception when it comes to inflation and that price increases and therefore interest rates will be higher in the UK longer than in the US and the Eurozone.»

«Today's inflation data has forced the market to lower those expectations. This suggests that perhaps some of the latest increases in the cost of borrowing for both government and households may ease slightly.”

1607 Net debt is forecast to rise sharply

While Wednesday's decline in bond yields is the largest since March, it only offsets about half of the upward spike seen since May.

Mr Dales said the chancellor still has «less money to play with than he had hoped» in an upcoming fall statement.

I Mogen Bahra, head of UK interest rate strategy at NatWest, said the bank remains «bearish on securities» given the government's continued heavy borrowing and the Bank of England's plan to sell off its massive stock of government debt.

Expected that official figures later this week will show the government borrowed £22bn in June alone to close the gap between tax revenue and government spending.

The UK's £2tn heap of debt also suggests debt servicing. spending will also remain high.

The Office of Budget Responsibility (OBR) expects interest payments on the debt to reach £94bn this fiscal year, a figure likely to increase in the autumn report.