The FTSE 100 rose sharply on Wednesday as investors shrugged off losses suffered earlier in the week after fresh inflation data lifted expectations for interest rate cuts.
Investors think the Bank of England will reduce base rate from 4 to 3.75 per cent on Thursday after weaker than expected inflation in November raised hopes for more cuts next year.
Sharp declines in energy and defence stocks hurt the FTSE 100 on Tuesday, but fresh Office for National Statistics data showing the consumer price index had fallen from 3.6 to 3.2 per cent helped to claw back losses.
The FTSE 100 was up almost 1.6 per cent at 9,835.3 by midafternoon to bring London’s blue-chip index within touching distance of the all-time intraday of 9,930.09 achieved on 12 November.
Financial services groups Phoenix and HSBC led FTSE 100 gains, adding 3.9 and 4.4 per cent, respectively, while the prospect of lower borrowing costs prompted uplifts of around 2.5 per cent for housebuilders Barratt Redrow and Persimmon.
The FTSE 100 was further bolstered by a US blockage of sanctioned tankers entering and leaving Venezuela, which lifted oil and precious metals prices.
Metlen Energy & Metals, Endeavour Mining and Anglo American each added more than 3 per cent.
The index has now added around 19 per cent since the start of the year.
Emma Wall, chief investment strategist at Hargreaves Lansdown, said: ‘Lower interest rates are good news for any corporate with leverage, and has the potential to boost domestic consumption too, which in turn could support corporate revenues.’
Bets on more aggressive BoE interest rates cuts weighed on sterling, which limited FTSE 250 gains to around 0.8 per cent.
And there was good news for the Government as gilt yields – the interest paid on UK debt – fell across all maturities.
Market pricing suggests the BoE will cut twice more next year, bringing base rate to 3.25 per cent by the summer.
But, while investors may now be positioning for a so-called ‘Santa rally’, David Morrison, senior market analyst at Trade Nation, urged caution.
He said: ‘The Grinch may be tempted to point out that inflation is still far above the Bank’s 2 per cent target, and there’s no guarantee that the downward trend that has started to emerge over the last few months is set to continue.
‘So, as things stand, the path of monetary policy over the next year remains far from clear.’
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