Analysts said the ease in inflation would give the Bank of England more leeway to consider additional rate cuts to support the economy.
Investors on Wednesday increased bets on the likelihood of an interest rate cut next month and are backing a second cut by the end of this year.
Bets on lower borrowing costs were also bolstered by inflation news coming out of the US, where data suggested the underlying pace of price increases was easing.
The monthly report from the Labor Department showed overall inflation rose to 2.9% in December, up from 2.7%.
But markets focused on so-called core inflation, which excludes volatile food and energy costs and is seen as a better indicator of the trends.
That metric fell unexpectedly from 3.3% to 3.2%, raising hopes the US central bank would cut interest rates in the months ahead.
Share prices jumped and yields in the US fell, moves that quickly rippled out to global bond markets, where borrowing costs had been rising in reaction to the dynamics in the US.
Germany was among the countries in addition to the UK where yields on government debt fell. The pound also rose in reaction to the news, to stand around $1.22.
However, Susannah Streeter, head of money and markets at Hargreaves Lansdown warned that borrowing costs for the UK remain high, despite today’s relief.
“Government borrowing costs have begun to edge downwards, with the yield on 10-year gilts heading lower, but it remains above 4.8%, at multi-decade highs as investors assess Britain’s debt burden,” she said.
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