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FTSE 100 close: London markets rise after inflation surprise raises prospect of rates being left on hold

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Over the course of the week it has gained 2.7 per cent, its strongest performance all year.
Over the course of the week it has gained 2.7 per cent, its strongest performance all year.

London markets climbed on Wednesday after a surprise fall in inflation in August made investors increasingly certain that interest rates are at or near their peak.

The FTSE 100 finished 0.9 per cent higher, hitting 7,731.65, while the FTSE 250 rose 1.6 per cent to reach 18,712.37.

Markets were buoyed after inflation fell to 6.7 per cent in August, down from 6.8 per cent in July. Most economists had predicted inflation would rise to around seven per cent thanks to rising energy costs.

Core inflation and services inflation, both measures which reflect the underlying rate more accurately than the headline rate, saw strong declines.

The fall in inflation casts some doubt on whether the Bank of England will hike rates again when it meets tomorrow.

“The case that interest rate rises have now gone far enough is looking increasingly convincing and the MPC could present a decision to hold fire as ‘wait-and-see’ rather than a definitive end to rate rises,” Martin Beck, chief economic advisor to the EY ITEM Club, said.

Either way, investors are growing increasingly confident that rates won’t have to go much higher. As Danni Hewson, AJ Bell head of financial analysis, pointed out “moments after the shock inflation number was released, the market expectation of a Bank of England rate rise began to plummet.”

Housebuilders Taylor Wimpey and Barratt Developments headed to the top of the FTSE 100, rising 5.6 per cent and 4.8 per cent respectively. Berkeley also rose 3.5 per cent.

The housing sector has been hit particularly hard by rising interest rates. There was also a positive read-across from construction firm Galliford Try, which posted a 88 per cent increase in profit and upped its guidance. Its shares were up 5.3 per cent.

Property investment firms Segro and Landsec saw gains too, rising 4.7 per cent and 4.4 per cent.

M&G saw strong gains as it beat market expectations. While assets under management had fallen, it said it was beginning to see an uptick in net inflows as market conditions improved.

Shares in M&G were up 1.6 per cent.