Markets surge as falling UK inflation eases fears of interest rate rises – business live

Hilary Osborne

Despite the headline inflation rate falling there are still some shocking numbers in today’s data which show just how difficult life is for households, our money editor Hilary Osborne writes.

Nearly all of the food and drink categories monitored by the ONS are still showing double-digit price growth, and there are a couple where the increase is picking up steam.

Sugar is up by 53.6% year-on-year – a huge increase. Crisps, too, are getting more expensive faster – they cost 19.4% than in June last year.

Olive oil prices are still showing a big increase, albeit one slightly lower than last month. They’re up by 44.8%, with warnings of more to come.

Away from food, car insurance, which is a must for drivers, is up by just over 50%.

The only silver lining is the fall in the cost of fuel – diesel and petrol are both down by more than 20%, but it’s worth remembering that those prices were breaking new records last summer.

We’ve just had confirmation that inflation was lower in Europe than in the UK last month.

Eurozone inflation was 5.5% in the year to June, statistics body Eurostat reports, matching its initial estimate, down from 6.1% in May.

Across the wider European Union, the inflation rate was 6.4% in June.

The lowest annual rates were registered in Luxembourg (1.0%), Belgium and Spain (both 1.6%).

The highest annual rates were recorded in Hungary (19.9%), Slovakia (11.3%) and Czechia (11.2%).

As in the UK, food inflation slowed in Europe last month while energy prices fell year-on-year.

But, core inflation in the eurozone rose.

Underlying prices, stripping out energy, food, alcohol & tobacco, rose by 5.5% per year last month, up from 5.3% in May, and higher than the initial estimate of 5.4%.

In the UK, we learned earlier, core inflation fell to 6.9% from 7.1%.

“Boom! We’ve just seen the strongest daily movement in UK mid cap stocks since February, with the FTSE 250 index initially jumping 3% on news of inflation cooling more than expected in June,” reports says Danni Hewson, head of financial analysis at AJ Bell.

Hewson explains:

The FTSE 100 advanced 1.3% to 7,548 – a positive move but less pronounced than the FTSE 250 because the blue-chip index has less exposure to the UK economy.

“The inflation reading has dampened the outlook for interest rate hikes in the UK, much to the excitement of investors. Two-year gilts fell from 5.079% to 4.842%, sterling fell 0.7% to $1.2937 in the space of 20 minutes and interest rate-sensitive stocks soared on the news.

“Housebuilders, including Crest Nicholson, saw gains of up to 7%, while commercial real estate companies such as British Land were close behind, and UK banks advanced by 2% to 3%.

“Investors are taking the view that if inflation is on a sustained downward path, then the Bank of England might be less eager to keep pushing up interest rates.

The market is desperate for that pivot moment where central banks call the end to the current rate rise cycle.

The rents paid by UK tenants have increased at the fastest rate since at least seven years, the Office for National Statistics reports.

The ONS says that the private rental prices paid by tenants in the UK increased by 5.1% in the 12 months to June, the largest annual percentage change since its data began in January 2016.

In England, private rental prices increased by 5.1% in the 12 months to June, or by 4.9% if you exclude London (where they rose 5.3%).

Rent rose by 5.8% per year in Wales, up from 5.0% in May 2023, and the highest annual percentage change at least 2010 (when the Wales data series began).

Private rental prices in Scotland increased by 5.5% in the 12 months to June 2023.

The ONS has also reported that average UK house price inflation has slowed, with prices rising by 1.9% in the 12 months to May, down from a 3.2% rise in April.

But prices were £7,000 below the recent peak in September 2022.

Full story: UK interest rates forecast to rise less sharply after inflation falls to 7.9%

Richard Partington

UK inflation fell further than expected in June to 7.9% amid a sharp fall in petrol prices, easing forecasts for how aggressively the Bank of England will need to raise interest rates over the coming year.

The Office for National Statistics said the annual inflation rate as measured by the consumer prices index resumed a downward path after unexpectedly sticking at 8.7% in May.

The drop exceeded City forecasts for a decline to 8.2%.

Financial markets responded to the figures by betting that the Bank of England would no longer drive interest rates above 6% early next year.

Raising further hopes of relief for mortgage holders, markets also predicted that the central bank would introduce a more modest quarter-point rise in borrowing costs at its next policymaking meeting in August instead of a tougher half-point increase from the current level of 5%.

Marcus Brookes, chief investment officer at Quilter Investors, has described today’s inflation figures as a “glimmer of light.”

But, Brookes also warned the UK is still a “drastic outlier” among developed countries when it comes to inflation.

He writes:

While the rate of the price rises has dropped to 7.9%, this is still far above where the Bank of England wants it to be before it can even consider a pause in the rate hikes we have become accustomed to.

“Frustratingly, while also beating expectations core inflation is remaining persistently stubborn and refusing to budge significantly. It may be that finally the well-known lags in the effect of interest rate rises are beginning to have an effect, but it still remains very sticky so way too early to begin celebrating.

“Demand has withstood both inflation and the rise in rates, but cracks are appearing, and as more mortgage holders get exposed to the current rates, the economy is likely to be hit as a result.

“This is unfortunately the path that is likely going to have to be taken in order to get inflation back down to target. The Bank of England has raised rates considerably, and shows no sign of slowing down and thus we are probably on a path to recession in 2024.”

There’s drama in the bond market too this morning, which could benefit those looking to remortgage in the months ahead.

The price of UK government bonds is surging, driving down the yield (or interest rate) on these gilts.

The yield on a two-year UK bond has dropped to 4.8%, down from over 5% last night – and a 15-year peak of 5.5% earlier this month.

That’s significant, as two-year gilts are used to price the cost of fixed-rate mortgages.

Neil Wilson of Markets.com says:

Annual CPI inflation declined to 7.9% in June from 8.7% in May, in what’s probably a huge relief for Threadneedle St [the Bank of England].

Core inflation was also down.

It doesn’t really matter too much what the finer details are and what the actual number is as far as markets are concerned, it’s all about the direction; and it’s going the right way.

Gilt yields fell sharply with the 2yr back to a one-month low at 4.833%, dropping ~25bps on the session for its biggest drop since March, having traded near 5.50% two weeks ago. It cements the market’s disinflation narrative.

Longer-dated UK government bonds are also rallying, reflecting renewed hopes that inflation will fall faster than feared, meaning interest rates will peak below 6%.

However, Moneyfacts has just reported that average mortage rates have risen this morning, following two days where they remained unchanged.

They say:

• The average 2-year fixed residential mortgage rate today is 6.81%. This is up from an average rate of 6.78% on the previous working day.

• The average 5-year fixed residential mortgage rate today is 6.33%. This is up from an average rate of 6.30% on the previous working day.

Clearly it’s too early for mortgage lenders to have reacted to this morning’s inflation report, but borrowers will be hoping to see rates fall in the days ahead, given the moves in the bond market….

Shares are rallying strongly in the City, as traders cheer the larger-than-expected drop in UK inflation to 7.9% in June.

The blue-chip FTSE 100 index hit its highest level since 21 June in early trading, and is currently up 93 points or 1.2% at 7,547 points.

Housebuilders are among the top risers, reflecting hopes that interest rates will not be raised to 6% or higher as feared.

Barratt Development, Persimmon and Taylor Wimpey have all jumped around 5%, helped by the falling expectations for UK interest rate rises.

Victoria Scholar, head of investment at interactive investor says:

“European equities have opened in the green and the FTSE 100 back above 7,500 with UK inflation figures in focus.

Housebuilders are at the top of the UK index, hitting a one-month high, thanks to a softer-than-expected CPI reading.

The FTSE 250 index, which contains smaller companies and is more UK-focused, has surged by around 2.5% this morning with nearly every stock rallying.

Traders will be hoping that the Bank of England does not need to hike borrowing costs as fast as feared, meaning less damage to the UK economy.