By Lars Mucklejohn
A sharp fall in inflation added further fuel to a Christmas rally as London’s FTSE 100 closed at its highest level since 20 September on Wednesday.
Having opened nearly 1.6 per cent higher, taking the blue-chip index to its highest level since early May, the capital’s premier index traded 1.13 per cent higher at 7,724.09 by the close.
Meanwhile, the mid-cap FTSE 250, which is more aligned with the health of the domestic economy, closed 1.51 per cent higher at 19,607.77 – its highest level since March.
The rally came after new figures showed inflation had fallen faster than expected in November, dropping to 3.9 per cent from 4.6 per cent the month before. Economists had expected a figure of 4.3 per cent.
The sharp fall in inflation bolstered the City’s view that the Bank of England would start cutting interest rates in the first half of next year.
“These inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
Traders think there is a 50/50 chance that loosening will begin in March while the Bank Rate is expected to hit four per cent by the end of next year.
This mood lifted rate-sensitive stocks, such as banks and housing companies who have been knocked by higher interest rates.
Sterling slumped 0.7 per cent against the dollar to trade at $1.2647 before paring some losses later in the afternoon. Lower rate expectations tend to hit currencies as it suggests investors will receive a lower rate of return.
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Yields on government debt also fell, as markets priced in lower interest rates in the year to come. The yield on the 10-year gilt has dropped to its lowest level since April.
Danni Hewson, head of financial analysis at AJ Bell, said the inflation figures delivered “a welcome shot in the arm for the UK economy”.
“However, there’s a long way to go to chip off that last 1.9 per cent and it’s impossible not to think about the potential impact the situation in the Red Sea could have on the cost of goods and energy,” she added.
Today’s rally comes off the back of a positive run for the FTSE 100, which has added more than three per cent since the start of the month.
Markets have been bullish since the Federal Reserve signalled last week that rates had reached a peak, with cuts likely to be cut early next year.
