By Shashwat Chauhan

(Reuters) -British stock markets rallied on Wednesday, with midcaps notching their best day in a month, as tame inflation reports from the UK and the U.S. fuelled expectations of more interest rate cuts this year.

The blue-chip FTSE 100 closed up 1.2%, while the FTSE 250 midcap index jumped 2.8% to log its biggest percentage gain since Dec. 15.

UK stocks were already higher after data showed British inflation slowed unexpectedly last month and core measures of price growth — tracked by the Bank of England (BoE) — fell more sharply.

Investors increased their bets on the BoE cutting rates, putting an 84% chance on a first quarter-point reduction on Feb. 6, the date of its next scheduled monetary policy announcement.

"The Bank of England will likely feel emboldened to continue its easing cycle in February. And rate cut expectations further out should ease on the back of today's data", said Sanjay Raja, Deutsche Bank's chief UK economist.

Further lifting the sentiment, lower-than-expected core inflation data for December and robust quarterly earnings from the biggest U.S. banks boosted U.S. stocks. [.N]

The revival in risk appetite followed days of selloff in global stocks after a strong U.S. jobs data and expectations of inflationary policies under incoming U.S. President Donald Trump sparked a rout in the bond market.

British government bond yields retreated from multi-decade highs on Wednesday, boosting rate-sensitive sectors.

Homebuilders led gains among the major FTSE sectors, jumping 5.7%. Real estate advanced 3.6%, while real estate investment trusts gained 3.9%.

British banks such as Standard Chartered, Barclays and NatWest were up between 3.3% and 6.6%.

Currys surged about 11% after the electricals retailer raised its annual profit outlook after reporting a 2% rise in underlying sales for the Christmas trading period.

(Reporting by Shashwat Chauhan and Sruthi Shankar in Bengaluru; Editing by Varun H K and Alan Barona)