The pound fell and the FTSE 100 rose yesterday after a bigger-than-expected fall in inflation added to expectations of interest rate cuts next year.
UK bonds also rallied after figures showed inflation fell to 4.6 percent in October, down from 6.7 percent in September and the biggest monthly fall on record since 1992.
Sterling fell by around a cent to around $1.24 against the dollar, while it fell almost half a cent to just under €1.145 against the single currency.
Stock markets were boosted by prospects of lower rates, with the FTSE 100 up 0.6 per cent and the mid-cap FTSE 250 gaining almost 0.8 per cent to hit its highest level in two months .
Momentum: Stock markets were boosted by prospects of lower rates, with the FTSE 100 up 0.6% and the mid-cap FTSE 250 gaining almost 0.8% to hit its highest level in two months .
Bank shares were among those to gain: Lloyds, HSBC and NatWest rose around 2 per cent, and Barclays rose 1 per cent.
The inflation figure was slightly lower than the 4.8 percent expected by economists.
The fall was mainly due to a big drop in energy prices caused by a reduction in the price cap set by regulator Ofgem, while food inflation also fell.
It seemed 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 met his target of halving the rate over the year, with two months to spare.
When he made the promise, inflation was more than 10 percent.
While Sunak has declared victory, the Bank of England’s goal of reducing inflation to 2 percent remains a long way off, and he has said the “last leg” of the journey will be the most difficult.
The Bank has tried to curb speculation about when an interest rate cut will occur, but markets are betting it will be next June, with a one in three chance of it happening in May.
The latest rally in London stock markets followed steady gains the previous day, when U.S. inflation also fell faster than expected, to 3.2 percent.
Russ Mould, investment director at AJ Bell, said: ‘The FTSE 100 maintained the momentum it had built up on Tuesday afternoon, as UK inflation tracked yesterday’s US reading and came in below expectations.
‘With confidence that there will be no rate hikes before the end of the year, the market now looks towards the prospect of rate cuts.
It remains to be seen whether inflation declines will stagnate and whether the Bank of England is as keen as Rishi Sunak to declare the mission accomplished in the fight against rising prices.
“For now, investors are in a celebratory mood and prospects for a big Santa Rally are increasing as we head into December.”
Samuel Tombs, chief economist at Pantheon Macroeconomics in the UK, said: “October’s consumer prices report has rightly bolstered expectations that the Monetary Policy Committee will be able to start cutting the bank rate in around six months.” .
Chris Hare, senior economist at HSBC, warned: ‘This does not mean the broader mission against high inflation has been achieved. And the road to 2 percent could be long and challenging.’
