FTSE slumps as Bank of England lifts rates to match financial crash era

·4-min read
The FTSE 100 fell sharply after of the central bank's interest rates decision. Photo: Dan Kitwood/Getty
The FTSE 100 fell sharply after of the central bank's interest rates decision. Photo: Dan Kitwood/Getty

European stocks fell deep in the red on Thursday as the Bank of England raised interest rates to 1.25% a day after the Federal Reserve’s biggest interest rates increase in 28 years.

The FTSE 100 (^FTSE) tumbled 3%, France’s CAC (^FCHI) was 2.6% lower on the day and the DAX (^GDAXI) declined 3.2% in Frankfurt.

The BoE delivered a fifth interest rate hike in a row on Thursday as it grapples with 40-year high inflation amid the thread of an economic slowdown.

Officials on the Monetary Policy Committee (MPC) voted to raise the key rate by a 25 basis points from 1% to 1.25%, defying pressure to act more aggressively in the wake of the Fed’s biggest rate hike since 1994.

It is the first time since the financial crisis era in January 2009 that the rate has been higher than 1%.

Only three members of the nine-strong MPC voted for an increase to 1.5% on Thursday.

Despite breaking away from hawkish peers, the central bank signalled prices could rise further, as it upgraded its inflation forecast. It not expects inflation to rise “slightly above” 11% by the end of the year, up from 10% at its May meeting.

Read more: Bank of England raises UK interest rates to 13-year high of 1.25%

Analyst have said Threadneedle Street is trying to "head off second order inflationary effects becoming ingrained in the system and taking on a life of their own".

Laith Khalaf, head of investment analysis at AJ Bell, said: "The Bank of England is playing a game of slowly, slowly catchy inflation, rather than the shock and awe tactics being employed across the Atlantic.

"Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate setting committee to observe more data as it comes in, and fine tune its approach as circumstances dictate.

"No-one should labour under the misapprehension that interest rate rises are going to do anything about eye-watering levels of inflation in the short term. Our inflationary problem is being driven by a supply shock to energy markets stemming from the conflict in Ukraine, and the ensuing sanctions, and no number of interest rate rises will solve that problem."

"Investor interest will turn to sterling, which has been under some pressure of late, not least because of the forecast of likely tepid growth, and with a potential spat with the European Union also weighing," said Richard Hunter, head of markets at Interactive Investor.

"Such pressure could be an ironic boost for the FTSE 100, where the majority of earnings come from overseas, thus making them more valuable in the translation back into sterling."

Read more: Interest rate rise: What it means for your money

The pound (GBPUSD=X) climbed in afternoon trade, up 1.2% against the dollar to $1.230 at the time of writing. Against the euro (GBPEUR=X) it rose half a eurocent at €1.17.

Across the Atlantic, US benchmarks fell sharply on the open after the Fed's biggest interest rate rise fuelled fears of a recession.

Wall Street’s S&P 500 (^GSPC) lost 114.38 points, or 3%, to 3675.61. The tech-heavy Nasdaq (^IXIC) crashed 3.7%, while the Dow Jones (^DJI) dipped 2.3% at London's close.

The Federal Open Market Committee (FOMC) raised its key rate by 75 basis points on Wednesday after figures on Friday showed consumer prices jumped another 1% in May from the previous month.

At a press conference that followed the decision, Fed chair Jerome Powell said the move was "an unusually large one." He added that he expected either a half-point or 0.75 percentage point lift at the Fed’s July meeting.

Read more: Ukraine war: Russia earns $20bn from oil revenue in May

The Fed also upgraded its inflation forecast for this year from 4.3% to 5.2%, while downgrading its 2023 inflation forecast to 2.6% from 2.7%.

Analysts have said markets are pricing that the central is trying to get ahead of the inflation curve rather than behind, but the aggressive tone coupled with skyrocketing inflation has sparked fears of a recession.

Wells Fargo (WFC) forecasts a "mild recession" starting in mid-2023, while Moody’s Analytics said that chances of a soft landing are lower.

Michael Hewson, chief market analyst at CMC Markets, said: "What this about turn by the FOMC does tell us is that the Fed has become much more concerned about inflation than it was a few days ago, which seems strange when you look at some of the more recent economic data."

Asian stocks were mixed overnight as investors cheered a major US rate lift that boosted Wall Street.

In Hong Kong, the Hang Seng (^HSI) fell 2.5%, and the Shanghai Composite (000001.SS) retracted 0.6%. The Nikkei (^N225) beat the trend, rising 0.4% in Japan.

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