Investors cheer ‘turning point’ in inflation battle: Property stocks lead bumper market rally as pound and gilt yields go into reverse

British pound and government borrowing costs plummeted and real estate stocks rose as a sharp fall in inflation suggested interest rates would not rise as far as feared.

In what was described as “a turning point” for the UK, official figures showed the consumer price index (CPI) of inflation fell from 8.7 percent in May to 7.9 percent in June.

That was the lowest level since March last year, down from a peak of 11.1 percent in October and below the 8.2 percent analysts had predicted.

The pound, which has risen on expectations of further aggressive rate hikes, fell below $1.29 after trading above $1.31 last week.

Yields on two-year government bonds, a key measure of government borrowing costs, fell below 5 percent to about 4.8 percent.

Earlier this month it reached 5.5 percent, the highest since 2008. And shares in homebuilders and other real estate stocks drove the FTSE 100 index 135 points higher to 7588.2 while the FTSE 250 rose 704.3 points to 19,322.52.

Among the blue-chips, Persimmon rose more than 8 percent and Barratt Developments gained 7 percent, while commercial real estate group Land Securities rose 7.6 percent.

On the second level, homebuilder Crest Nicholson was up 11.3 percent.

Danni Hewson, head of financial analysis at AJ Bell, said: ‘Investors believe that if inflation is on a sustained downward path, the Bank of England may be less inclined to push interest rates further.

“The market is desperate for that turning point where central banks call the end of the rate hike cycle.”

But she added, “We’ve had a lot of false dawns in the last year.” Until the figures were released, it was believed that the Bank of England would raise interest rates from 5% to 5.5% next month.

There were also fears that rates could exceed 6 percent by the end of the year, raising borrowing costs for households worried about their mortgages, as well as businesses.

But investors are betting on a smaller interest rate hike to 5.25 percent in August and think rates may not or barely reach 6 percent this year.

Analysts were also encouraged to see core inflation, which excludes volatile items such as food and energy, fall to 6.9 percent, from a three-decade high of 7.1 percent.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, described the fall in inflation as “a turning point”.

Nicholas Hyett, investment manager at the Wealth Club, said: ‘While one swallow doesn’t make a summer, there will be real hope that this marks a turning point for UK inflation.

“It has remained stubbornly high even as other economies have begun to ease price increases, and that has led to a vicious crisis in the cost of living.”