By Carla Mozee, MarketWatch

U.K. inflation rate hits highest since September 2013

U.K. stocks flipped into the red Tuesday, pulled down as the pound climbed after data showed British inflation rising by the fastest pace in more than three years.

The FTSE 100 shed 0.1% to 7,420.29, with only the financial and oil and gas sectors rising. The blue-chip gauge on Monday closed a choppy session (http://www.marketwatch.com/story/ftse-100-slips-as-the-pound-hits-3-week-high-2017-03-20) by gaining 0.1% at 7,429.81, enough to notch an all-time closing high.

The index on Tuesday has been up roughly 0.2% before it was shoved lower as the pound surged to an intraday high of $1.2472.

Sterling climbed came as the U.K. headline inflation rate rose to 2.3% in February, stoking speculation that the Bank of England may be compelled to raise interest rates sooner than later. Blue-chip shares tend to rise when the pound falls, as the currency's decline can boost the prospect of stronger earnings and sales from overseas multinational companies.

See:BOE rate hike in May? Pressure mounts after U.K. inflation jumps to 3-year high (http://www.marketwatch.com/story/boe-rate-hike-in-may-pressure-mounts-after-uk-inflation-jumps-to-3-year-high-2017-03-21)

But most bank shares extended gains after the inflation reading from the Office for National Statistics breached the Bank of England's 2% target for the first time since September 2013. A lift in interest rates by the central bank from a record low 0.25% would be beneficial for profit margins at banks.

Shares of Barclays PLC (BCS) (BCS) rose 1.5%, Royal Bank of Scotland PLC shares (RBS.LN) (RBS.LN) picked up 1.1% and Lloyds Banking Group PLC (LLOY.LN) (LLOY.LN) was up 0.8%.

But shares of Asia-focused lenders Standard Chartered PLC (STAN.LN) turned down 0.1%, and HSBC Holdings PLC (HSBA.LN) (HSBA.LN) (HSBA.LN) swung down 0.2%.

The yield on the 10-year gilt rose after the inflation report, lifted up by 6 basis points to 1.28%, according to Tradeweb. Higher yields are a benefit for life insurers. Shares of Standard Life PLC (SL.LN) gained 1.5%, trading at the top of the FTSE 100.

(https://twitter.com/samueltombs/status/844127352825233409)

Inflation: Rising fuel and food prices contributed to the 2.3% inflation reading, which was above expectations of 2.1% in a FactSet survey of analysts.

Last week, the Bank of England voted 8-1 to leave the rate steady (http://www.marketwatch.com/story/boe-holds-rates-but-takes-hawkish-tone-2017-03-16), but board member Kristen Forbes wanted a rate rise to stay ahead of inflationary pressures.

"With inflation set to rise further over the course of this year, today's data is rather 'big' upside news," said Kallum Pickering, senior U.K. economist at Berenberg, in a note Tuesday.

"As our base case, we look for a 25 basis points first rate hike in Q2 2018, with a 30% chance the BOE raises the bank rate earlier. After today's data release, risks to that call are skewed towards the BoE hiking sooner rather than later," Pickering said.

Sterling on Monday had been above $1.24 ahead of the inflation report, but was knocked down after the U.K. government said British Prime Minister Theresa May will trigger Article 50 on March 29 (http://www.marketwatch.com/story/uk-prime-minister-to-trigger-start-of-brexit-process-on-march-29-2017-03-20) to begin the process of leaving the European Union, known as Brexit.

Sterling closed Monday's session at $1.2357 in New York.

Read:BOE chief Carney warns against giving into 'fatigue' for post-crisis reforms (http://www.marketwatch.com/story/bank-of-england-chief-warns-against-giving-into-fatigue-for-post-crisis-reforms-2017-03-17)

Stock movers: On the mid-cap FTSE 250 , shares of Bellway PLC (BWY.LN) gained 1.9% after the home builder said first-half pretax profit rose 9.3% (http://www.marketwatch.com/story/bellway-pretax-profit-rises-on-sales-growth-2017-03-21) on rising sales.

(http://www.marketwatch.com/story/is-the-uk-headed-for-a-snap-election-this-year-bookies-are-more-certain-than-ever-2017-03-20)Read:Is the U.K. headed for a 'snap' election this year? Bookies are more certain than ever (http://www.marketwatch.com/story/is-the-uk-headed-for-a-snap-election-this-year-bookies-are-more-certain-than-ever-2017-03-20)

And see:The trouble brewing in Scotland for the U.K.'s Theresa May (http://www.marketwatch.com/story/distracted-by-the-continent-may-ignores-trouble-brewing-in-scotland-2017-03-21)

 

(END) Dow Jones Newswires

March 21, 2017 07:04 ET (11:04 GMT)

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