The FTSE 100 enjoyed its best week in four months between 17 and 21 July, gaining nearly 3% across the course of five trading sessions. This followed up on a decent performance in the previous week and helped put the index in positive territory for the year.

The main driver of positive sentiment has been lower than expected inflation numbers on both sides of the Atlantic. First on 12 July US CPI came in at 3% versus the forecast 3.1% and then on 19 July UK CPI at 7.9% was below the anticipated rate of 8.2%.

This prompted an immediate drop in gilt yields, which reflect the borrowing costs of businesses and consumers, on the assumption easing inflation will mean the Bank of England does not need to raise rates as far or as fast as previously thought.

In this context, it is no great surprise to see housebuilders and property stocks among the top FTSE 100 performers. As well as being sectors whose fortunes are closely tied to the UK economy, they also have correlation with interest rates.

Berenberg chief economist Holger Schmieding observed that market expectations (based on overnight index swaps) for the peak Bank of England interest rate topped out in early July at 6.5% by March 2024.

He adds: ‘Although we emphasise the risks stemming from the Bank of England’s damaged credibility, we also thought that market pricing had gone too far. In our base case, we look for the bank rate to peak at 5.5% in September with risks skewed towards a 5.75% peak rate.’

Interestingly, Schmieding believes longer-term expectations for rates are pitched too high at 4.4% by the end of 2025. ‘That is well above our own call of 3% by end-2025 – which is based on the historical observation that the Bank of England generally undertakes sizeable and rapid cuts soon after the bank rate has peaked.

‘Over the past 50 years, the average cutting cycle lasted around 12 months, during which the policymakers reduced the bank rate by around 350 basis points.’ The next Bank of England base rate decision will be made on 3 August.

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