By Shashwat Chauhan and Shristi Achar A
(Reuters) -London's FTSE 100 rose on Wednesday after a wobbly start following data showing a surprise jump in domestic inflation, while markets waited for the U.S. Federal Reserve to announce its latest interest rate decision.
The blue-chip FTSE 100 index reversed an earlier fall to close 0.4% higher, with consumer staples like Unilever (LON:ULVR) and Reckitt Benckiser leading gains.
Britain's consumer price index (CPI) inflation unexpectedly rose to 10.4% in February, lifting sterling on expectations of higher interest rates although the pound later pared gains, helping lift the internationally focused FTSE 100.
The Fed could set the tone for other central banks as it decides whether to press ahead with its policy tightening amid concerns over the banking sector.
"The consensus may be coalescing around a 25 basis point hike, but then we still worry about financial market stability and banking prices," said Marija Veitmane, senior multi-asset strategist at State Street (NYSE:STT) Global Markets.
"So there are expectations that the Fed will be mindful of that and will give markets some soothing words about not going too aggressive and that is supporting market a little bit."
The more domestically focused FTSE 250 midcap index eased 0.1%.
Recent turmoil in the banking sector after the collapse of two U.S. regional lenders and troubles at Credit Suisse (SIX:CSGN) have led traders to alter their expectations for rate hikes.
Although the market had begun to question whether the Bank of England would hike rates again on Thursday, the inflation data cemented expectations of 25 bps hike.
Terminal rate expectations also shifted after the CPI data, with traders now looking at rates peaking in September at 4.6% versus a peak of 4.3% in August.
Real estate stocks fell 2.3%, with British Land Company sliding 6.0% after Goldman Sachs (NYSE:GS) downgraded the stock on rising vacancies.
Retailer Marks and Spencer (LON:MKS) Group rose 4.5% after Exane BNP Paribas (EPA:BNPP) raised its rating to "neutral" from "underperform".
Fevertree Drinks jumped 9.5% as the tonic maker said it will increase prices and ramp up U.S. production.