Market report

US and UK may diverge on rates after inflation data

London Stock Exchange

Bank of England policy makers may choose to cut interest rates earlier than the Federal Reserve after US inflation came in slightly higher than expected.

Inflation rose to 3.5% in March from 3.2% in February and ahead of forecasts of 3.4%, driven by higher costs for fuel, housing, dining out and clothing.

The FTSE 100 in London, which had moved higher on the back of strong figures from Tesco, dipped on the US data which pointed to a delay in a rate cut that had been pencilled in for June. Some traders are now cancelling any expectation of cuts in the US this year.

The dollar, which rises when interest rates are likely to remain high, strengthened by 0.9% against a basket of leading currencies to reach a six-month high, making commodities more expensive. All three key indices on Wall Street closed around 1% lower.

Richard Flynn, managing director at Charles Schwab UK said: “In recent months it has become clear that the journey to the Fed’s target of 2% inflation will be bumpy and central bankers are proceeding with caution when it comes to rate changes.

Nathaniel Casey, investment strategist at Evelyn Partners, says markets are now expecting fewer than the three some were forecasting.

However, the FTSE 100 index bounced back into the black to close 26.42 points higher at 7,961 on suggestions that the Bank of England will follow its own course as inflation in the UK is expected to fall.

Danni Hewson of AJ Bell said: “Goldilocks isn’t finding today’s temperature to her liking on the other side of the Atlantic.

“But things are different in the UK and Europe and central banks here will be plotting their own paths.

“On the way up the Bank of England jumped first and the question is whether the same could be needed on the way back down.”

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