UK government bond yields experienced a significant drop on Tuesday, resulting in a positive impact on interest-rate sensitive sectors of the London stock market. This development followed a report indicating that retail inflation in Britain had reached its slowest pace in over a year.

According to the British Retail Consortium, the decline in the cost of domestically-grown food led to a decrease in annual shop price inflation to 5.2% in October, down from 6.2% in September. This marks the fifth consecutive monthly decline and represents the lowest rate since August 2022.

Meanwhile, recent figures from the UK government revealed that the number of companies entering insolvency in England and Wales is expected to reach its highest level since the 2009 financial crisis.

The combination of easing price pressures and struggling businesses has strengthened the belief that the Bank of England will maintain its current interest rates of 5.25% following its upcoming monetary policy meeting on Thursday.

Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, explains, "Grocery prices are still rising, albeit at a slower pace, which is alleviating some of the concerns felt by shoppers at the tills." She further notes, "This is also favorable for Bank of England policymakers, as expectations are growing that they will once again hit the pause button on interest rates."

As a result, there has been increased demand for UK government bonds. The 10-year gilt yield BX:TMBMKGB-10Y dropped by 7.7 basis points to 4.484%, reaching its lowest level in two weeks.

Consequently, shares of London-listed stocks that are particularly sensitive to changes in borrowing costs have experienced positive gains. Housebuilder Persimmon PSN, +2.04% rose more than 2%, real estate group British Land BLND, +2.25% added 2%, and clothing retailer Next NXT, +1.17% advanced by 1.5%.

On the other hand, BP's stock BP, -3.44% declined by 4% as the energy giant failed to meet earnings expectations. The underperformance in the resources sector limited the FTSE 100 UK:UKX to a 0.5% gain. In contrast, both the DAX DX:DAX in Frankfurt and the CAC 40 FR:PX1 in Paris recorded positive gains of 0.6% and 1%, respectively.

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