London stocks drop after inflation data, focus shifts to Fed

British stock indexes dropped on Wednesday as investors reined in bets on interest rate cuts by the Bank of England, while global risk sentiment was fragile ahead of a policy decision from the U.S. Federal Reserve later in the day.

The blue-chip FTSE 100 ended 0.7% lower, racking up the steepest losses among European peers, while an index of midcap stocks was down 0.5%. Both the indexes closed at their highest since early September on Tuesday.

UK annual consumer price inflation was steady at 2.2% in August, in line with forecasts, data showed. However, services inflation - a figure closely watched by the Bank of England - rose to 5.6%, slightly more than forecast.

The British pound rose against the dollar following the inflation data, which further pressured the FTSE 100's export-focused companies.

Evidence of persistent inflationary pressures led traders to trim bets on the BoE cutting rates at its Thursday meeting, where policymakers are expected to keep rates on hold.

"The surge in services prices is more pronounced in the UK than in the other major economies, which explains why we think that UK interest rates will only be lowered gradually," said Andrew Wishart, senior UK economist at Berenberg.

Meanwhile, U.S. stocks edged lower as investors remained cautious ahead of a policy announcement from the Federal Reserve, which is expected to begin its policy easing cycle later in the day though the size of the rate cut is still not clear.

Futures prices show the chance of a 50-basis-point rate cut has leapt to 55% from around 14% a week ago, as per CME's FedWatch tool, even as most major brokerages still forecast a 25-bp reduction.

Reckitt Benckiser rose 1.2% after a media report the company is in early discussions with potential suitors for a sale of its homecare assets.

Losses were broad based among sub-sectors with the exception of defence and telecoms.