FTSE 100 sinks after shock UK inflation increase

London’s leading index was dealt a heavy blow on Wednesday as UK CPI inflation unexpectedly rose in December, throwing the timing of the UK’s first rate cut after an extended hiking cycle up in the air.

The FTSE 100 was down 1.6% at the time of writing.

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UK investors were reminded that interest rates may stay higher for a prolonged period after UK CPI unexpectedly rose to 4% in December from 3.9% in the month prior.

“Frustration is in the air as UK inflation continues to prove stubborn. The slight rise in the headline rate to 4% is the last move companies and households wanted to see, as it pushes the prospect of interest rate cuts further down the line,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

The reading will be a real headache for the Bank of England, which is under increasing pressure to lower borrowing costs to avoid a UK recession.

As inflation dipped last year, markets were quick to price in UK interest rate cuts early in 2024. Today, this positioning unwound as investors assessed data suggesting the Bank of England would not cut rates for the first time until later in the year.

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“Investors have had to rip up their game plan after UK inflation went in the wrong direction to support the narrative for interest rate cuts,” said Russ Mould, investment director at AJ Bell.

“Coming at 4% versus a market forecast of 3.8%, it’s still double the long-term target for the Bank of England and could act as the deciding factor for the Monetary Policy Committee to sit on their hands at their next vote and keep rates higher for longer.

This morning’s UK inflation data follows several comments by European central bankers warning markets not to expect too many rate cuts in Europe in 2024.

US CPI inflation has also recently come in hotter than expected.

Interest rate-sensitive sectors

As expected, Interest rate-sensitive sectors were among the biggest losers on Wednesday.

Housebuilders were at the forefront of the rally at the end of last year, inspired by hopes of interest rate cuts. However, Taylor Wimpey, Barratt Developments, Berkeley Group Holdings, and Persimmon sank between 2% and 4.7% on Wednesday as the thesis for last year’s rally diminished. 

Although interest rate-sensitive sectors led the declines, the FTSE 100’s sell-off was broad. Just six of the 100 constituents were positive at the time of writing.

Real Estate Investment Trusts were among the worst performers, with Land Securities and Unite Group taking a beating.

Just a day after Ocado rallied on strong results for their retail arm, the company once more displayed its tech stock attributes. Higher interest rates are generally seen as bearish for fast-growing technology stocks and bring their lofty valuations into question. 

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