European stocks fell on Wednesday, as traders awaited the US Federal Reserve chair’s congressional testimony, while higher than expected UK inflation reinforced views that the Bank of England would extend its tightening campaign for longer. 

Europe’s region-wide Stoxx 600 dropped 0.2 per cent, following two successive days of falls, while France’s Cac 40 dropped 0.2 per cent and Germany’s Dax was flat. 

The moves came after official data showed that the annual rate of consumer price inflation in the UK remained at 8.7 per cent in May, well above analysts’ expectations of 8.4 per cent, boosting chances that BoE policymakers would increase interest rates further.

Core inflation, which excludes volatile food and energy prices, rose again to 7.1 per cent in May, from 6.8 per cent in the previous month.

Traders in futures markets are now betting that BoE policymakers will increase rates by at least 0.25 per cent from the current 4.5 per cent as they meet on Thursday, and expect that rates will peak at 6 per cent by the end of the year. 

“May’s hotter than expected out-turn suggests that the fight against inflation is far from over, particularly given sky-high food bills and rising core inflation,” said Suren Thiru, economics director at accountancy body ICAEW.

Yields on two-year gilts, which are sensitive to interest rate changes, rose 0.12 percentage points to 5.06 per cent, while the yield on the benchmark 10-year rose 0.07 percentage points to 4.4 per cent. Bond yields rise as prices fall.

The pound strengthened 0.3 per cent against the dollar, trading at $1.28 after the announcement, before pulling back to $1.27.

London’s FTSE slid 0.6 per cent, led by a 2.2 per cent decline in real estate stocks, as “rising interest rate expectations have pushed up monthly mortgage payments, which will contribute to a slowdown in trading activity and house prices this year”, said Tom Bill, head of UK residential research at Knight Frank.

Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 both slipped 0.1 per cent ahead of the New York open. 

Investors are waiting for Fed chair Jay Powell to give his semi-annual testimony before the House Financial Services Committee later in the day, hoping to gauge his stance on future monetary policy in the US. 

The US central bank opted to keep the benchmark federal funds rate steady last week, at a target range of between 5 per cent and 5.25 per cent, but signalled that two additional rate increases were likely later in the year. 

Markets were pricing in a 76 per cent chance that the Fed would raise rates next month, according to data compiled by Refinitiv and based on interest rate derivatives prices.

Equities traded lower in Asia, with China’s benchmark CSI 300 stock index falling 1.5 per cent, while the Hang Seng China Enterprises index of Hong Kong-listed mainland companies dropped 1.8 per cent.

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