By Shristi Achar A, Pranav Kashyap and Johann M Cherian
(Reuters) -London's FTSE 100 closed flat on Wednesday with caution looming ahead of the U.S. Federal Reserve's policy decision, while softer domestic inflation data cemented bets of interest rate cuts this year from the Bank of England.
The globally-focussed FTSE 100 held its ground at 7,737.38 points with traders gearing up for the Fed's monetary policy decision at 1800 GMT and remarks on the timing of interest rate cuts.
Closer to home, Britain's inflation cooled to 3.4% in February ahead of the Bank of England's monetary policy verdict on Thursday and offering some respite to Prime Minister Rishi Sunak before an election expected later this year.
Rate sensitive sectors such as banks and gained 0.6% and 1.1% respectively.
Traders now see about 70 basis points of rate cuts by the BoE this year, up from around 67 bps prior to the data release. [0#BOEWATCH]
"While the Bank of England will also cheer the decline in the headline figure, it is unlikely to be convinced that the battle against inflation is won," said Zara Nokes, global market analyst at J.P. Morgan Asset Management.
"The Bank will instead be keeping a watchful eye on the medium-term inflation outlook, particularly the domestically-generated inflation originating from the services sector."
So far this year, UK stocks have underperformed developed economy peers, given a stagnating economy and uncertainty on the timeline for interest rate cuts.
On the day, the domestically focused FTSE 250 added 0.3%, with Johnson Matthey (LON:JMAT) gaining 7.8% to hit a 10-month high following the chemicals maker's announcement that it will sell its medical device components business to Montagu Private Equity for $700 million.
The broader chemicals sector (FTNMX552010) advanced 3.4%.
Among others, Burberry fell 3.3%, tracking a fall in European luxury goods group Kering (LON:0IIH), which warned about a potential sales drop in the first quarter.
The stock dragged the personal goods index by 3.7% to an over 11-year low.
Halma (LON:HLMA) Plc rose 3.9%, among top FTSE 100 performers, after UBS upgraded the technology firm to "buy" from "neutral".