Britain’s main stock indexes fell on Wednesday after a surprise fall in consumer prices did little to calm speculation of a large interest rate hike from the Bank of England next week.
The blue-chip FTSE 100 slid 1.5% and the mid-cap FTSE 250 fell 1.7%, extending losses from Tuesday when a hotter-than-expected U.S. inflation reading raised bets for more aggressive policy tightening in the world’s largest economy and sparked a global equities sell-off.
Investors took little comfort from data that showed British consumer price inflation fell for the first time in almost a year in August on the back of lower fuel prices.
“The market is taking the view that generally we’re living in a higher inflation regime despite today’s inflation numbers,” Andrea Cicione, head of strategy at TS Lombard said.
“One data point doesn’t make a trend and inflation could actually get worse in months to come. So the Bank of England will want to see a definite trend of lower inflation before they start reining back the hawkish rhetoric.”
Traders see an 87% chance of a 75 basis point interest rate hike to 2.5% by the Bank of England on Sept. 22, which would be its biggest rate rise since 1989, excluding a brief attempt to bolster sterling during a 1992 exchange rate crisis.
“The 9.9% inflation is still bad news after we’ve had six rate hikes by the Bank of England since December last year,” said David Madden, a market analyst at Equiti Capital.
Among sectors, construction and materials and homebuilder indexes declined the most as housebuilders brace for a tough market, hurt by rising mortgage rates and a worsening cost-of-living crisis.
Redrow slipped 0.3% after the housebuilder said demand was moderating to historical levels following two strong years for the sector. (Reporting by Johann M Cherian, Bansari Mayur Kamdar and Aniruddha Ghosh in Bengaluru; Editing by Uttaresh.V and Mark Potter)