Shares surge as falling inflation boosts hopes of cheaper borrowing

Share prices in the UK and around the world rallied as markets welcomed signs that the impact of inflation is easing.

UK inflation slowed more sharply than expected to 4.6 per cent last month saw the FTSE 100 share index at one point gain 85 points, or 1.1 per cent, to a one-month high of 7,525 points. The FTSE 250, which focuses more on domestic British companies, rose 253 points to 18789 points, a 1.8 per cent rise which wiped out its losses so far this year.

The pound fell 0.3 per cent in value against the dollar to be worth $1.246 as traders saw the inflation figures, the lowest since 2021, as further evidence the Bank of England has finished raising interest rates to curb inflation.

The cost of government borrowing also got cheaper as bond or gilt yields – the rate of return on buyers of UK debt – dropped. Yields on two-year bonds fell to 4.53 per cent, while those on longer 10-year bonds dipped to 4.14 per cent, the lowest point for almost six months.

Falling UK inflation followed overnight gains on Wall Street where investors cheered the drop in US inflation to just 3.2 per cent last month. Inflation in Italy and France also slowed an annual rate of 1.8 per cent and 4.5 per cent respectively last month, according to data released.

Victoria Scholar, investment head at interactive investor, said: “The Bank of England will be encouraged by the lower-than-expected inflation readings both at the headline and core levels with the central bank increasingly likely to keep rates on hold for the third consecutive time at its next decision meeting.

“Reflecting this expectation, the pound is under pressure today against the US dollar and the euro and the yield on the 10-year UK gilt has fallen to the lowest level since the start of June. UK housebuilders like Barratt Developments, Taylor Wimpey and Berkeley Group are trading sharply higher too amid broader gains for UK equities and growing risk appetite.

“The central bank’s 14 straight rate hikes prior to September’s pause continue to make their way through the economy. But with the Bank of England either at or very close to the peak of the rate hiking cycle, some mortgage lenders have been improving their offers with two-year fixed mortgage deals dipping below 5 per cent for the first time in five months.”

Shares in property companies and house builders jumped in anticipation that interest rate cuts, which many believe could now come as early as next May, will revive interest in house buying and increase the numbers of affordable mortgage deals available.

It comes as Britain’s biggest mortgage lenders have started a pre-Christmas price war, with high-street banks including Halifax and HSBC announcing fresh cuts to fixed-rate mortgage deals.

Susannah Streeter, analyst at Hargreaves Lansdown said: “Investors have a spring in their step, as hopes rise that the fight against inflation is gaining ground.”

“The UK is finally shaking off its unwanted status as the global inflation outlier with today’s report showing that price growth has plunged by more than expected, after a frustrating three-month stall,” said Ben Laidler, investment analyst at trading and investment platform eToro.

The MSCI world equity index, which tracks shares in 49 countries, rose 0.5 per cent to its highest since mid-September, following a positive session in Europe and a rally across Asia, aided by a report of economic stimulus in China.