The pound fell and the FTSE 100 rose yesterday after a bigger-than-expected fall in inflation, adding to expectations of interest rate cuts next year.
British bonds also recovered after data showed inflation fell to 4.6 percent in October – down from 6.7 percent in September and the biggest single-month fall on records dating back to 1992.
Sterling fell about a cent lower to almost $1.24 against the dollar, while it fell almost half a cent to just under €1.145 against the common currency.
Stock markets were buoyed by the prospects of lower interest rates, with the FTSE 100 rising 0.6 percent and the mid-cap FTSE 250 rising almost 0.8 percent to reach a two-month high.
Boost: Stock markets were buoyed by the prospect of lower interest rates, with the FTSE 100 rising 0.6% and the mid-cap FTSE 250 gaining almost 0.8% to reach a two-month high
Banks were among the stocks to gain, with Lloyds, HSBC and NatWest up around 2 percent, and Barclays up 1 percent.
The inflation rate was slightly lower than the 4.8 percent that economists had predicted.
The decline was mainly due to a large drop in energy prices, caused by a reduction in the price ceiling of regulator Ofgem, while food inflation also decreased.
It appeared to mark a turning point in the cost of living crisis, which had seen inflation peak at 11.1 percent last fall.
And it means Prime Minister Rishi Sunak has achieved his target of halving interest rates over the course of the year, with two months to spare.
When he made the promise, inflation was over 10 percent.
Although Sunak has declared victory, the Bank of England’s target of reducing inflation to 2 percent remains a long way off – and it has said the ‘last mile’ of the journey will be the toughest.
The Bank has tried to temper speculation about when a rate cut will happen, but markets are betting it will be June next year, with about a one in three chance of May.
The latest rally in London stock markets followed steady gains the day before, when US inflation also fell faster than expected, to 3.2 percent.
Russ Mould, investment director at AJ Bell, said: ‘The FTSE 100 retained the strength it had built on Tuesday afternoon, as UK inflation followed yesterday’s US reading and came in below expectations.
‘With confidence there will be no interest rate increases before the end of the year. The market is now looking ahead to the prospect of interest rate cuts.
Whether the decline in inflation will come to a halt and whether the Bank of England is as eager as Rishi Sunak to declare that its mission in the fight against rising prices has been accomplished remains to be seen.
“For now, investors are in the mood to celebrate and the prospects of a big Santa Rally are increasing as we approach December.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The October consumer prices report has rightly raised expectations that the Monetary Policy Committee could start cutting bank interest rates in about six months.”
Chris Hare, senior economist at HSBC, warned: ‘This does not mean the broader mission against high inflation has been accomplished. And the road to 2 percent can be long and challenging.”