UK stocks surged and the pound fell against the dollar on Wednesday morning after the UK recorded a significant drop in inflation to the lowest levels since 2021.
UK CPI fell to 4.6% in October, down from 6.7% in September, in a major step down in inflation rates.
“Inflation has tumbled to 4.6% – smashing the government’s target to halve by the end of the year, and hitting its lowest point in two years. It’s still way above the Bank of England’s target of 2%, but it’s heading in the right direction. Unfortunately, we can’t get too excited, because it’s not going to be downhill all the way from here,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
Traders are now pricing in UK rate cuts of up to 80 bps next year.
Lower inflation rates coupled with the increasing chance of rate cuts next year buoyed UK stocks on Wednesday morning, and the FTSE 100 started the session 0.8% higher at 7,502.
Housebuilders were among the risers, as were UK-focused retailers. UK banking shares rose as gilt yields fell.
“Lower than expected inflation is good news for consumers, it provides an additional boost to their spending power and will hopefully ease some of the day-to-day financial pressure. Pressure will also ease on the Bank of England and it’s battle with inflation, with the bank increasingly likely to hold interest rates steady into the new year,” said James McManus, chief investment officer at Nutmeg.
GBP/USD fell 0.2% to 1.2473 as traders considered Bank of England rate cuts next year.