European stocks given boost by falling UK inflation

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European stocks rose on Wednesday, as a faster than expected drop in UK inflation further added to investors’ hopes that central banks could soon draw their historic tightening campaigns to a close. 

Europe’s region-wide Stoxx 600 added 0.5 per cent at the opening bell, extending gains from the previous session, while France’s Cac 40 added 0.7 per cent and Germany’s Dax advanced 0.5 per cent. 

London’s FTSE 100 rose 0.9 per cent, leading gains in the region, after official data showed that UK inflation slowed beyond analysts’ expectations, offering the Bank of England some relief ahead of its next monetary policy decision in August. 

The Office for National Statistics said the UK’s annual consumer price inflation eased to 7.9 per cent in June, from 8.7 per cent in the previous month, landing below the 8.2 per cent forecast of economists polled by Reuters.

The reading ended a four-month streak of UK price growth readings that exceeded forecasts, easing the pressure on BoE policymakers who have already lifted interest rates to 5 per cent, their highest level since 2008.

“We finally got a much needed and long-awaited cooling in UK inflation, which will come as a huge relief to both policymakers and the government,” said Jamie Dutta, market analyst at Vantage.

The figures come a week after slower than expected US inflation gave a boost to global markets.

The FTSE 100 index of largest London-listed companies has trailed far behind its peers in the region since the start of the year, as investors worried that sticky price pressures in the UK would force the central bank to keep interest rates higher for longer. 

But the inflation reading on Wednesday made it more likely that the BoE Monetary Policy Committee will lift rates by 0.25 percentage points at their next meeting in August, instead of another 0.5 percentage point increase.

“One slower CPI print is not enough to cause a change in policy. But [BoE governor] Andrew Bailey and his team will hope that it is the start of a trend,” said Chris Beauchamp, chief market analyst at IG Group.

The pound fell 0.68 per cent against the dollar, trading at $1.2943 after the data release — its lowest level in a week.

The rally in European equities was also helped by comments from European Central Bank governing council member Klaas Knot, who on Tuesday said it was not certain whether the ECB would continue to lift interest rates beyond its policy meeting next week. 

The yield on the policy-sensitive two-year German government bond slipped 0.07 percentage points to 3.1 per cent on Wednesday, while the yield on a 10-year bond, a regional benchmark, fell 0.05 percentage points to 2.29 per cent. 

Meanwhile, contracts tracking Wall Street’s S&P 500 and those tracking the tech-focused Nasdaq 100 were both flat ahead of the New York open. 

Asian equities declined, as China’s stalled economic recovery and the government’s slow rollout of stimulus measures weighed on market sentiment. The Hang Seng index dropped 1.2 per cent, while China’s blue-chip CSI 300 index slipped 0.4 per cent.