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Investors take fright as inflation shock fuels rate-rise fears

City markets today reacted with alarm to the worse than expected inflation figures (Luciana Guerra/PA) (PA Archive)
City markets today reacted with alarm to the worse than expected inflation figures (Luciana Guerra/PA) (PA Archive)

City markets today reacted with alarm to the worse than expected inflation figures with gilt yields up and shares falling on fears of further interest rate rises.

The Consumer Price Index dropped to only 8.7% in April compared with economists’ expectations of 8.3%. Even more worryingly core CPI, which excludes volatile food and energy prices, actually rose from 6.2% to 6.8%, the highest since March 1992.

The “sticky” data sent forecasters scurrying to revise their projections with financial markets now foreseeing the Bank of England having to raise rates at least twice more to 5% by August — and probably further still in the autumn.

A hike to 4.75% next month is now seen as a certainty, with the City seeing rates peaking around 5.5% and staying at or above 5% well into next year.

Meanwhile the FTSE-100 fell 1.5% or 114.13 points to 7648.2, and sterling rose 0.11 cents against the dollar to $1.2426. Gilt yields jumped towards levels seen in the aftermath of last September’s mini-Budget, with the two-year yield hitting 4.38 before cooling off slightly.

Russ Mould, investment director at brokers AJ Bell said: “Bond markets took one look at the latest inflation figures and took the view that interest rates are going to keep going up. The UK 10-year gilt rate jumped to 4.3%, the highest since last October and significantly ahead of the 3% level seen only three months ago.

“Sticky inflationary pressures, particularly in food, will strengthen the argument for the Bank of England to raise rates again. That will bring more pain to companies and consumers as the cost of servicing borrowings becomes more expensive.

“The stock market didn’t like the news, with the FTSE 100 falling 1.5% to 7,643. There were only two stocks rising in the index – testing group Intertek and renewable energy expert SSE. The biggest fallers were housebuilders and property companies, understandable given their sensitivity to interest rate moves.

Sandra Horsfield, economist at banking and fund management group Investec said: “This is a disappointing set of numbers that will cause more angst among MPC members that the hoped-for disinflationary process is not as decisive as anticipated.”