Investors rattled by shock inflation rise
sHares fell, and the pound and borrowing costs rose as an unexpected increase in inflation sent shockwaves through financial markets.
in a blow to hopes of early interest rate cuts, the office for National statistics said inflation rose to 4pc in December from 3.9pc in November after a hike in tobacco duty.
it was the first increase in ten months and defied expectations of a further fall to 3.8pc, though inflation is still well below the 40year high of 11.1pc, which was reached in october 2022.
The figures prompted traders to scale back bets on how soon the Bank of england will cut interest rates, having hiked them to a 15-year high of 5.25pc.
according to financial markets, the chances of a rate cut in may are now around 50pc. such a move was all but nailed on before the latest inflation figures were published.
‘investors have had to rip up their game plan after UK inflation went in the wrong direction to support the narrative for interest rate cuts,’ said russ mould, investment director at aJ Bell.
The FTse 100 tumbled 1.5pc, or 112.05 points, to 7446.29 while the FTse 250 was down 1.7pc, or 328.95 points, to 18,864.37.
Housebuilders were among the biggest losers – Persimmon fell 5pc, or 73p, to 1395.5p and Barratt Developments was 3.4pc, or 18p, lower at 519.6p – amid fears mortgage rates will stay higher for longer, hitting demand for new homes. sterling rose towards $1.27 and €1.17 and gilt yields – a key measure of how much the Government pays to borrow – rallied.
european stock markets were also down yesterday, with the major benchmarks in Frankfurt, Paris, milan and madrid all falling at least 0.8pc, after the european Central Bank (eCB) played down talk of early rate hikes.
eCB president Christine Lagarde said it was likely to cut rates in the summer, pushing back against hopes for rapid and aggressive cuts as early as march.
in a further blow to sentiment globally, the Chinese economy grew at a weakerthan-expected annual rate of 5.2pc in the final quarter of 2023.
The price of oil fell by almost $1 to just over $77 a barrel amid fears over weaker demand from China. analysts said that UK inflation is likely to fall further as the year progresses, particularly given an expected cut to the energy price cap in april, paving the way for the Bank to lower rates.
But while investors at the start of this year were pencilling in six cuts, taking rates to 3.75pc in December 2024, they now expect four or, possibly, five.
Julian Jessop, economics fellow at the institute of economic affairs, said: ‘The tick-up in UK inflation in December will probably delay the first rate cut, but one small miss in one month’s data does not change the big picture.’
He added: ‘inflation is still likely to fall to the 2pc target in april and the markets will continue to price in large rate cuts later in the year.’