FTSE Close: UK shares sink as rate cut hopes diminish

A stubborn inflation reading and hawkish central bank rhetoric dampened hopes for interest rate cuts, sending UK shares broadly lower on Wednesday.

The FTSE 100 plunged 1.5% to finish at 7,446.29. The mid-cap FTSE 250 index and small-cap AIM All-Share also posted sharp declines, falling 1.7% and 1.2%, respectively.

A key driver of the selloff was fading optimism over a potential rate cut by the Bank of England in May. While traders had previously assigned a high probability to easing, Wednesday’s higher-than-expected UK inflation print threw cold water on the idea. Markets are now questioning whether the central bank can justify lowering rates with price growth still well above target.

The shift also weighed on rate-sensitive names like homebuilders. Persimmon sank 5% for one of the largest declines in the blue-chip index. Marks & Spencer and Frasers Group fell over 2% each amid worries about the consumer outlook if rates stay elevated.

On the upside, pub operator Mitchells & Butlers surged 4.6% to lead gainers after issuing upbeat holiday sales numbers and raising its full-year guidance.

But luxury firms felt the pinch of disappointing data out of China, a key export market. Mulberry dropped 4.8% as it posted a holiday revenue decline, while LVMH traded 2.7% lower in Paris.

With central banks globally taking a more hawkish tilt, additional volatility may be in store for UK shares unless the growth and inflation backdrop improves. For now, the window for rate relief appears to be closing.