London’s flagship index jumped on Wednesday after UK CPI inflation fell to 2.5% in December from 2.6% in the month prior, and investors celebrated the potential impact on interest rates.
Even though inflation is still well above the 2% base rate, the simple fact that inflation halted its ascent sent a wave of optimism through UK assets after a gloomy start to the year.
UK stocks rose, bond yields fell, and the pound showed signs of stabilisation.
The FTSE 100 surged 0.7% higher, led by UK and interest rate-sensitive sectors, including housebuilders and utility companies. Even the banks joined the rally.
“A surprise pullback in the rate of inflation has given joy to investors,” said Russ Mould, investment director at AJ Bell.
“It strengthens the argument for the Bank of England to continue cutting interest rates and that’s fired up shares in housebuilders in the hope that mortgage rates will go down and more people will be able to afford to get onto the housing ladder. Banking shares jumped on the prospect of more demand in the mortgage market.
“The inflation reading has also helped to lower bond yields, with the 10-year gilt easing back a little to 4.841%, which will be welcomed with open arms by the under-fire chancellor, Rachel Reeves. However, the prospect of higher costs for companies this year still threatens to drive up inflation if they decide to raise prices, which means people’s living standards won’t suddenly improve because of today’s inflation reading.”
Although many problems still persist for the UK economy, there was little ill feeling in UK equities on Wednesday.
Barratt Redow, Taylor Wimpey and Persimmon jumped around 3%, while Howden Joinery added 3.6% in the hope lower inflation would spur building activity.
Lloyds was 3.5% as investors chose to focus on the financial health of Lloyds customer base instead of how interest rates could impact key profitability and income margins.
Diploma was the top riser, up 3.6%, after reporting organic revenue growth of 7% and maintaining full-year guidance.
There were few losers on Wednesday. Precious metals miners felt the pressure off improving sentiment while a broker downgrade hit Anglo American.