Market News

BY  Tim Wallace

Britain’s borrowing costs have tumbled as investors expressed relief over the temporary pause in hostilities between the US and Iran.

The UK’s benchmark 10-year borrowing costs dropped to 4.7pc on Wednesday, down from last month’s peak of more than 5.1pc.

Traders in financial markets also trimmed bets on Bank of England interest rate increases this year on hopes that disruption to oil and gas supplies from the Gulf will ease.

The moves will save Rachel Reeves, the Chancellor, around £4bn a year and offer relief to homeowners.

It came after Donald Trump unveiled an 11th-hour ceasefire deal with Iran on Tuesday night.

Although cracks were appearing in the ceasefire after markets closed on Wednesday, investors considered the agreement to be a step forward.

Simon French, the chief economist at Panmure Liberum, said: “On Tuesday afternoon, you had to price in some element of nuclear war.

“I think the most valuable bit was not the detail of the ceasefire but the fact that a ceasefire was agreed in the first place. Things may re-escalate for a period, but the market has seen that at some point it all becomes a bit too hot for both sides.”

Investors are still pricing in substantial disruption, with yields still far higher than their pre-war levels, Mr French added. Rates on 10-year gilts were just 4.2pc at the end of February.

Swap rates, which banks and building societies typically use to price mortgages, tumbled alongside gilt yields.

Five-year swaps fell from a peak of almost 4.45pc to 4pc – though this is still firmly above the 3.5pc charged at the end of February.

Adam French, of Moneyfacts, said: “Markets have reacted to easing tensions by pushing down expectations for future interest rate rises. Because swap rates reflect these expectations, they have started to fall too, reversing some of the sharp increases seen since the conflict began.

“It should take the immediate upward pressure off mortgage rates.”

Ten-year government borrowing costs are still above the 4.23pc rate charged by lenders before the war but the drop from the peak seen during the conflict offers some relief to the Chancellor on the mounting cost of servicing the £3tn national debt.

The increase in borrowing costs since the war had threatened to cost the taxpayer £2bn a year, but Wednesday’s fall has reduced this by around half.

At the same time, the Chancellor stands to save around £3bn a year from lower interest rates.

Financiers now anticipate one rise, from 3.75pc to 4pc, in either July or September. That is down from the two or three increases anticipated earlier this week.