By Shashwat Chauhan and Sruthi Shankar
(Reuters) -British stocks closed sharply higher on Wednesday, with homebuilders notching their biggest percentage gain since 2008 after signs of slowing inflation helped to bolster hopes of peaking UK interest rates.
The domestically oriented FTSE 250 index outperformed with a 3.8% jump, its best session in more than eight months.
The internationally focussed FTSE 100 rose 1.8% to hit a one-month high.
Beaten down homebuilders surged 7.0% as investors cheered data showing British inflation fell to a more than expected 7.9% in June, its slowest pace in more than a year. Economists were forecasting a rise of 8.2%.
"The numbers are still way higher than where the Bank of England would like them to be. But directionally, it's nice to see the monetary policy having some impact," said Richard Flax, chief investment officer at Moneyfarm.
"The BoE will be torn. The fact that you are beginning to see inflation slow down means they'll end up doing 25 (bps rate hike) but I don't think it's an obvious call one way or another."
Markets now expect a quarter-percentage point rise in interest rates on Aug. 3 is likelier than the half-percentage point increase which had been priced in on Tuesday. Bank Rate was no longer seen peaking at 6%.
Other rate-sensitive stocks such as real estate and real estate investment trusts added 7.0% and 7.2%, respectively.
Hargreaves Lansdown (LON:HRGV) surged 8.8% after the investment platform reported higher net new business and assets under administration in the fourth quarter.
Aston Martin Lagonda Global Holdings gained 8.9% after Goldman Sachs (NYSE:GS) upgraded the luxury automaker to "buy" and Severn Trent (LON:SVT) rose 3.5% after the water supplier said it had a strong start to this financial year.
UK-listed shares of Chilean miner Antofagasta (LON:ANTO) slipped 1.4% after lowering its full-year copper output forecast and Rio Tinto (LON:RIO) edged 0.3% lower after it flagged concerns about a global economic slowdown.
Segro added 7.1% after Exane BNP Paribas (EPA:BNPP) upgraded the warehousing specialist to "outperform" from "underperform".
($1 = 0.7723 pounds)