By Bansari Mayur Kamdar and Shashwat Chauhan
(Reuters) -European shares rose in a broad-based rally on Wednesday as government bond yields across the continent fell, while investors eyed the U.S. Federal Reserve's verdict on monetary policy tightening later in the day.
The pan-European STOXX 600 index added 0.9% following two consecutive sessions of losses.
Real estate stocks, often considered a bond proxy, advanced 2.2% as government bond yields fell. [GVD/EUR]
In Britain, gilt yields notched a bigger decline and the pound dropped after data showed Britain's high inflation rate unexpectedly slowed in August, raising the prospect of the Bank of England (BoE) pausing its long run of interest rates hikes as soon as Thursday.
"The softness in today's inflation data came as a shock to us, the market and the BoE," strategists at BNP Paribas (EPA:BNPP) wrote in a note.
"The (BoE's) Monetary Policy Committee would continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation."
Britain's FTSE 100 added 0.9%, while the personal and household goods sector, which houses the country's major homebuilders, gained 0.7%.
Euro zone banks jumped 2.0%, as Italy's UniCredit (LON:0RLS) surged 4.7%
Traders pointed at CEO Andrea Orcel's "bullish" statements in a conference for the rise.
Commerzbank (ETR:CBKG) added 1.6% after the German lender's finance chief said on Tuesday it expects to earn net interest income of 8 billion euros ($8.5 billion) this year, as it benefits from higher interest rates.
Investor focus will be on the Fed's policy decision due at 1800 GMT, where the U.S. central bank is expected to stand pat on interest rates.
In Germany, producer prices posted their biggest year-on-year decline in August since data collection began in 1949, spurring hopes for further easing of inflation in Europe's largest economy.
Among other individual stocks, Just Eat Takeaway (LON:JETJ) jumped 7.1% after a federal judge said on Tuesday the company's U.S. unit Grubhub and other food delivery groups can sue New York City over a law capping how much it can charge restaurants for delivering meals.
Talanx slipped 10.0% after the German insurer on Tuesday initiated a capital increase of up to 300 million euros ($320.4 million).
Delivery Hero rose 7.1% after the German food delivery group confirmed talks on a partial sale of its Asia business.