UK stocks notch two-month highs as U.S. inflation cools

By Johann M Cherian and Sruthi Shankar

(Reuters) -The UK's main stock indexes closed at near two-month highs on Thursday, joining a global rally sparked by cooling U.S. inflation that drove expectations of smaller interest rate hikes by the Federal Reserve.

The FTSE 100 rose 1.1% to its strongest close since Sept. 13. However, a rally in the pound checked further gains in the exporter-heavy index. [GBP/]

The domestically focussed FTSE 250 index jumped 3.9% to post its biggest percentage gain in eight months.

The rally came as Wall Street's main indexes soared after data showed U.S.consumer prices rose less than expected in October, spurring bets that the Fed will hike interest rates by a smaller 50 basis points in December. [.N]

"U.S. inflation data has provided a welcome shot in the arm for markets, with the declines seen across both headline and core inflation bringing the kind of optimism that has been lacking without seeing non-energy related inflation turn lower," said Joshua Mahony, senior market analyst at online trading platform IG.

UK equities have climbed along with global stocks in recent weeks as hopes that the U.S. central bank will slow its pace of rate hikes and better-than-expected earnings offset data signalling a weakening domestic economy.

The midcap index has rallied nearly 17% off its October lows, but is still down as much on a year-to-date basis. The blue-chip FTSE 100 has bounced 8% from its trough, erasing nearly all of its annual declines.

A survey on Thursday showed British house prices fell for the first time in 28 months in October and rising mortgage costs threatened to put further pressure on the property market.

Among single stocks, AstraZeneca rose 2.9% after the drugmaker raised its full-year adjusted earnings forecast on a boost from sales of its roster of cancer drugs.

Power company Centrica climbed 7.4% after it forecast its annual adjusted earnings per share outlook to be at the top end of analysts' expectations, and announced a share buyback of up to 5% of its share capital.

WH Smith added 5.1% after the company, which sells everything from books and sandwiches to Bluetooth headphones, reinstated dividends and posted an annual profit.

(Reporting by Johann M Cherian in Bengaluru; Editing by Sherry Jacob-Phillips, Uttaresh.V and Jonathan Oatis)