LONDON: British equities jumped on Wednesday as investors cheered a surprise drop in domestic inflation, which spurred hopes that the Bank of England (BoE) could consider interest rate cuts early next year.

The blue-chip FTSE 100 advanced 1.0%, touching its highest level since May 24 earlier in the session, outpacing the pan-European STOXX 600, which closed 0.3% higher.

The pound dropped 0.5% after official data showed British inflation fell by more than any economist polled by Reuters predicted in November, pushing the headline rate to its lowest since September 2021.

“UK inflation has not been this low in over two years, so this news will come as some relief to consumers. However, let’s not forget prices are still rising - just at a slower pace - cost-of-living pressures have not suddenly disappeared,” said Charles Hepworth, investment director at GAM.

The annual rate of increase in the consumer prices index dropped to 3.9% in November from 4.6% a month ago.

Investors moved to price in two quarter-point rate cuts by the BoE for the first half of next year, with the first potentially coming as soon as March.

The domestically-focused FTSE 250 midcap index also added 1.6%, hitting a more than nine-month high.

Rate-sensitive real estate and real estate investment trusts were the top gainers, advancing 2.4% and 2.7%, respectively.

Heavyweight energy stocks added 1.3%, boosted by higher crude oil prices, while banks were up 1.2%.

Most major FTSE 350 sectors rallied, with travel and leisure rising 1.4%.

Yields on UK government bonds fell, with the yield on the benchmark 10-year gilt last at 3.549%.

Among individual stocks, Intertek Group jumped 3.7% after Exane BNP Paribas upgraded the product testing company’s rating to “outperform” from “underperform”.

Petrofac soared 42.4% after the oilfield services provider secured a $1.4 billion contract.