UKX FTSE 100 Index

By Carla Mozee and Victor Reklaitis, MarketWatch

U.K. inflation rate hits highest since September 2013

U.K. stocks closed lower Tuesday, pulled down as the pound climbed after data showed British inflation rose by the fastest pace in more than three years.

The FTSE 100 shed 0.7% to end at 7,378.34, retreating from a record closing high hit in the previous session. The British benchmark also was weighed by a broad selloff, as key European (http://www.marketwatch.com/story/french-stocks-rise-standing-out-in-subdued-moves-across-european-equities-2017-03-21) and U.S. equity gauges (http://www.marketwatch.com/story/us-stock-futures-edge-up-as-nasdaq-tries-for-another-record-2017-03-21) all posted solid declines as the trading day wrapped up in London.

Inflation rose to 2.3% in February, above the Bank of England's 2% target for the first time since September 2013. That stoked speculation that the central bank may be compelled to raise interest rates sooner than later, sending the pound surging to an intraday high of $1.2491 but shoving the FTSE 100 lower. Sterling was recently (http://www.marketwatch.com/story/euro-jumps-vs-dollar-hitting-6-week-high-of-108-after-french-presidential-debate-2017-03-21) at $1.2486, up from $1.2357 late Monday in New York.

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)

Blue-chip stocks tend to rise when the pound falls, as the currency's decline can lead to stronger earnings and sales from overseas for multinational companies. The pound has dropped roughly 17% against the dollar since the U.K. voted last June to leave the European Union, or Brexit.

Tuesday's data "has shifted the needle because we now know that inflation is probably going to top 3% by the end of the year. But we can't just keep hiding behind Brexit. We have to normalize the economy, we have to have reasonable interest rates and prepare people...that borrowing cheap money is over," said Steve Ruffley, chief market strategist at InterTrader, in a telephone interview.

A rate increase by the central bank from a record low 0.25% would be beneficial for profit margins at banks. But shares of banks pared gains or turned lower in afternoon trade. Barclays PLC (BCS) (BCS) finished up by 0.7%, while Royal Bank of Scotland PLC shares (RBS.LN) (RBS.LN) lost 0.7% and Lloyds Banking Group PLC (LLOY.LN) (LLOY.LN) declined 0.8%.

Asia-focused lenders Standard Chartered PLC (STAN.LN) closed down 0.1%, and HSBC Holdings PLC (HSBA.LN) (HSBA.LN) (HSBA.LN) ended down 0.6%.

The yield on the 10-year gilt , as the benchmark U.K. government bond is known, also pared its rise, moving up 2 basis points to 1.24%, according to Tradeweb. Higher yields are a benefit for life insurers. Shares of Standard Life PLC (SL.LN) finished 0.1% lower after an earlier gain evaporated.

Utility stocks were higher after the inflation report, with National Grid PLC (NG.LN) closing up 1%.

See:EU sets April date for special Brexit summit (http://www.marketwatch.com/story/eu-sets-april-date-for-special-brexit-summit-2017-03-21)

Elevated FTSE: Ruffley said the Bank of England may begin raising rates in the first or second quarter of 2018, when policy makers will have more information about Brexit but before the country leaves the EU.

The FTSE 100 on Monday rose 0.1% to a record close of 7,429.81 (http://www.marketwatch.com/story/ftse-100-slips-as-the-pound-hits-3-week-high-2017-03-20), aided by the pound's drop after the U.K. government said it would 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 Brexit process.

"For the stock market to keep going higher on uncertainty is a very unusual phenomenon," Ruffley said. "A correction in the FTSE, like all indices, is inevitable. However, more short-term traders like myself have learned very painful lessons by trying to short the market," he said.

"Although the FTSE can continue to make new highs and correlate with the American markets and a drop in the pound, it is fundamentally due a retracement, and when it happens it's going to be fast, it's going to be hard," he said.

The index is up 3.3% this year. It leapt 14% in 2016.

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

Inflation: Rising fuel and food prices contributed to the 2.3% reading, which was above expectations of 2.1% in a FactSet survey of analysts. Last week, the central bank voted 8-1 to leave the key 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 increase 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.

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)

(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 13:09 ET (17:09 GMT)

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