The FTSE 100 closed at a record high of 9,847 on Friday, driven by better-than-expected inflation data that raised expectations of an interest rate cut at the Bank of England's August meeting.
The Office for National Statistics reported that UK inflation fell to 1.8 per cent in June, down from 2.1 per cent in May and below the Bank of England's 2 per cent target for the second consecutive month. Core inflation, which excludes food and energy, fell to 2.3 per cent from 2.6 per cent.
The data significantly increased market expectations of a rate cut at the Bank's August meeting. Futures markets were pricing in a 78 per cent probability of a 25 basis point cut, up from 45 per cent before the data release. A cut would take the Bank Rate from 4.25 per cent to 4 per cent.
The pound fell 0.4 per cent against the dollar on the news, to $1.2680, as lower interest rates reduce the return on sterling-denominated assets. Against the euro, sterling was broadly flat.
Housebuilders and retailers led the FTSE 100 gains, as lower interest rates would reduce mortgage costs and potentially boost consumer spending. Banks fell modestly, as lower rates compress net interest margins.
The Bank of England's Monetary Policy Committee meets on 7 August. The Governor has previously indicated that the committee would need to see sustained evidence of inflation returning to target before cutting rates. Friday's data provides that evidence, though committee members have been cautious about committing to a specific path.