Borrowing costs for the UK government have plunged, as an unexpected drop in inflation at home and in core inflation in the US raised bets that central banks will cut interest rates in the months ahead.

The yield - or interest rate - charged on key UK government debt dropped below 4.8%, retreating after last week’s surge, when it had hit the highest level in 16 years.

The moves followed new figures showing inflation cooled to 2.5% in December, from 2.6% in the prior month.

It has eased pressure on Chancellor Rachel Reeves whose Budget policies have been criticised for contributing to the market turmoil.

UK bond yields soared to their highest levels since 2008 last week, as concerns over the UK’s economic outlook and rising borrowing costs spiked.

The yield on 10-year gilts, as bonds issued by the UK government are known, had been approaching 4.9%, reflecting investor unease.

But government data on Wednesday, which showed inflation dropping for the first time in three months, appeared to help calm the market somewhat.