FTSE 100 reverses early losses as UK inflation falls back to BoE target

The FTSE 100 reversed early losses on Wednesday after UK inflation fell back to the Bank of England’s 2% target in May.

One would question what the market is actually looking for from inflation data to gauge the Bank of England’s timing of interest rate cuts, given the FTSE 100 dropped and the pound spiked higher following news UK inflation had finally fallen back to target after 34 months.

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London’s leading index hit lows of 8,164 in very early trade before grinding higher through the rest of the session to trade 0.15% higher at 8,202 at the time of writing.

“Inflation hitting the Bank of England’s 2% target might not be the magic moment desired by investors. The pound jumped on the news, implying little chance of the Bank cutting rates at its meeting tomorrow. Few thought it would happen anyway, but today’s figures make it even less likely,” says Dan Coatsworth, investment analyst at AJ Bell.

The early drop in stocks and jump in the pound stemmed from disappointment around headline CPI. Even though the inflation fell back to 2%, it was higher than economist expectations of 1.9%, suggesting prices are still running hotter than initially thought and could curtail the BoE’s willingness to cut rates.

“Inflation hitting target means many will be expecting a cut to interest rates at the Bank’s meeting tomorrow. However, it would be very unlikely for the ratesetters to cut interest rates during an election campaign,” said Laura Suter, director of personal finance at AJ Bell.

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“The future path for inflation – and so rates – will be impacted by whoever becomes prime minister and how their fiscal policy shapes up. It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut. With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.” 

The uncertainty around an interest rate cut weighed on the housebuilders, who were among the worst performers on Wednesday. A soft set of full-year results from Berkeley Group didn’t help the sector’s cause, with confirmation of a drop in revenues and profits sending the stock 4.5% lower on the day.

Persimmon was not far behind with a 3.8% drop. Barratt Developments slipped 2.7%.

Smurfit Kappa was the best performer on the news that, following its merger with Westrock, the enlarged group will be tracked by US indices. At the time of writing, it was 4% higher.

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