The FTSE 100 ( ^FTSE ) and European stocks were higher on Wednesday as City investors increased bets on interest rate cuts from the Bank of England in September after UK inflation rose by less than expected last month.

Money markets now indicate a 45% chance that Threadneedle Street will cut to 4.75% next month, down from its current level of 5%, and a 55% chance that borrowing costs remain unchanged.

Before Wednesday morning’s inflation data, a September rate cut stood at a 36% probability, according to City pricing.

It came as the consumer prices index (CPI) rose for the first time this year to 2.2% in July, up from 2% in both May and June, according to the Office for National Statistics (ONS). This was less than the 2.3% rise expected by analysts.

Ruth Gregory, deputy chief UK economist at Capital Economics, said the data will “reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year”.

Meanwhile, Kyle Chapman, FX markets analyst at Ballinger Group, said: "The Bank of England will take a huge sigh of relief this morning, having seen services inflation finally coming lower."

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