Footsie closes in on 10,000 as inflation eases: Investors pin their hopes on a string of rate of interest cuts

The FTSE 100 soared to within striking distance of the 10,000-mark and UK borrowing costs fell yesterday as markets cheered a bigger-than-expected drop in inflation.

Housebuilders were among the big climbers as the figures made an interest rate cut today all but certain and boosted hopes of further cuts.

The FTSE 100 climbed by as much as 1.7 per cent before giving up some gains to close 89.53 points, or 0.9 per cent, up at 9774.32.

Meanwhile, yields on UK bonds, known as gilts, dropped sharply. Yields on ten-year gilts fell from 4.52 per cent to 4.45 per cent. 

For two-year gilts, which are closely linked to interest rate expectations, they tumbled from 3.76 per cent to as low as 3.69 per cent – the lowest since August 2024.

The pound fell by as much as a cent versus the dollar to $1.33 and by half a cent against the euro to less than €1.14.

Rally: The FTSE 100 blue chip index climbed by as much as 168 points, or 1.7%, to 9853 before giving up some of the gains to close 89.5 points or 0.9% up at 9774.3

It came after the Office for National Statistics said Consumer Price Index inflation was 3.2 per cent in November, an eight-month low and down from 3.6 per cent in October. Economists had been expecting 3.5 per cent.

Danni Hewson, head of financial analysis at AJ Bell, said: ‘Easing inflation has set a fire under the UK stock market.’

Hewson said a ‘Santa rally’ could plausibly see the Footsie hit 10,000 this year. ‘There are a number of reasons why falling inflation is a boon,’ Hewson said.

‘It means a less constrained consumer, who can spend more on the goods and services of listed companies. It also means those companies face lower costs and, in theory, that includes lower wage demands.

‘Inflation heading back to the Bank’s 2 per cent target suggests lower interest rates are on the cards, which would be good for companies with debt and for their customers’ spending habits.’

Among rising stocks were housebuilders Barratt Redrow, up 3.7 per cent, Berkeley, 2.5 per cent higher and Persimmon, up 2.3 per cent.

Banks HSBC rose 2.7 per cent and Barclays gained 1.7 per cent. The slide in gilt yields was a boost for Rachel Reeves as it means investors demand lower returns for buying UK debt, which lowers Government borrowing costs.

Some experts said the inflation dip could prompt the Bank of England to signal faster rate cuts next year than currently expected. 

But with unemployment rising and the economy stagnating, there is a risk that the Bank has ‘fallen behind the curve’, said Kallum Pickering, chief economist at Peel Hunt, who predicted that the Bank will cut rates again in February.