Markets are frightened by fears of future rate increases

London’s stock exchange fell sharply in the morning after inflation figures renewed concerns that Bank of England would have to raise interest rates.

FTSE 100 fell to its lowest level for more than a week, dropping 124.77, or 1.6 percent, to 7,638.83. FTSE 250, which is more focused on the UK, retreated by 259.46, or 1.4 percent, to 18,948.60.

CPI inflation was lower than expected in the month of August, at 8.7%. Core inflation reached a record high of 6.8% for the first time in 31 years. This confirms bets on the central bank’s refusal to ease monetary policy.

Cathal Kennedy is a senior UK economist with RBC. He said: “Today’s CPI printing probably removes any debate about a further rise in Bank Rate at the June MPC.”

The London leading share index was led by housebuilders who were concerned about the possibility of higher mortgage rates which could make housing less affordable. Persimmon fell by 64 1/2p or 5 percent to £12.211/2; Taylor Wimpey dropped by 6p or 4.9 percent to 117 1/4p. Barratt Developments declined by 21 3/4p or 4.4 percent to 473 1/2p. Berkeley Group fell by 166p or 4 percent to £40.39.

Bond yields rose due to expectations of higher interest rates. This weighed down on stocks that are sensitive to rate changes, such as property and utilities companies. United Utilities, Severn Trent and British Land both lost 29 1/2p or 3 per cent to £10.10, and 62p or 2.2% to £27.35, respectively.

The mixed results of Aviva in the first quarter impacted other financial stocks. Legal & General the FTSE 100 pensions & insurance group lost 8p or 3.3 percent to 229 1/4p. The Asia-focused insurer shed 48p or 4.1 percent to £11.23.

Six blue-chip stocks were the only ones to have gained as we approached midday. Intertek was one of them. The product testing and certification expert repeated its annual guidance. Its shares rose by 124p or 3 percent to £43.16. Marks & Spencer jumped 20 1/4p or 12.3 percent to 183 1/4p. This was after announced that it would reinstate a quarterly dividend following a better-than-expected annual profit.

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