UPDATE 2-UK bond market squeeze eases for Reeves after inflation data

Updates prices after US inflation data, adds analysts paragraphs 3 and 14-15

By Suban Abdulla and William Schomberg

LONDON, Jan 15 (Reuters) - British government borrowing costs reversed a big chunk of their 2025 surge on Wednesday after inflation readings in the Britain and the United States paved the way for faster interest rate cuts, easing some of the pressure on British finance minister Rachel Reeves.

Yields on British government bonds, or gilts, fell sharply on the back of softer-than-expected British price growth figures. The fall accelerated later in the session when U.S. data also pointed to waning inflation pressure.

"The U.S. inflation data will come as a relief to a wide variety of policymakers - the Fed as well as the UK Treasury - as global yields move lower," Hetal Mehta, head of economic research at St. James's Place, a wealth management firm, said.

British gilt yields have risen along with global yields recently, in part driven by expectations of increased U.S. inflation pressures once Donald Trump takes over the White House against the backdrop of an already strong U.S. economy.

But the increase in borrowing costs in Britain has been sharper than elsewhere, reflecting nerves among investors about Reeves' plans to increase public borrowing, higher payroll taxes which economists say are likely to slow the economy, and persistently strong inflation pressures.

However, financial markets showed on Wednesday an 85% chance of a quarter-point cut at the BoE's next rate decision announcement on Feb. 6 and a 100% chance of a further quarter-point cut by September.

On Tuesday, the chance of a second rate cut by the end of 2025 was seen at only 60%.

Two-year gilt yields GB2YT=RR, which are especially sensitive to short-term interest rate expectations, fell by as much as 17.5 basis points on the day to a low of 4.429%, back to their levels on Jan. 7 before the start of the selloff.

The 30-year GB30YT=RR gilt yield was on course for its biggest daily fall since December 2023 and was down 15 basis at 5.30% at 1450 GMT.

Ten-year gilts GB10YT=RR have now recovered about half their losses since the start of the year.

Sterling - which has also been hit hard over the past week - rose after the U.S. inflation data.

Despite the softer reading of UK inflation, price growth remained above the BoE's 2% target, and some analysts expect it to reach 3% as soon as the release of figures for January.

"The upcoming Trump presidency has heightened global uncertainty and inflation expectations," Monica George Michail, an associate economist at the National Institute of Economic and Social Research, said.

"Therefore, although we expect the Monetary Policy Committee to gradually cut rates in 2025, we think the Bank will remain cautious, and rates may remain higher for longer," she said.

(Additional reporting David Milliken; Editing by Toby Chopra)

((william.schomberg@thomsonreuters.com; +44 207 542 7778; Reuters Messaging: william.schomberg.reuters.com@reuters.net))