Sept 22 (Reuters) –
UK shares fell on Thursday after an expected 50 basis point interest rate hike by the Bank of England in a bid to tame inflation fueled fears of an economic slowdown.
The blue-chip FTSE 100 index declined 0.5% by 11:32 GMT after briefly paring some losses following UK central bank’s rate decision.
The Bank of England raised its key interest rate to 2.25% from 1.75% and said it would continue to “respond forcefully, as necessary” to inflation, despite the economy entering recession.
“The Bank of England delivered in line with expectations,” said Sanjay Raja, senior UK economist at Deutsche Bank Research.
“The door is now open for a bigger hike in November, with the MPC explicitly acknowledging that should their updated outlook points to more persistent inflationary pressures, including from stronger demand, the Bank stands ready to respond forcefully.”
The BoE estimates Britain’s economy will shrink by 0.1% in the third quarter – partly due to the extra public holiday for Queen Elizabeth’s funeral – which, combined with a fall in output in the second quarter, meets the definition of a technical recession.
Healthcare stocks like AstraZeneca and GSK declined more than 1% each, weighing on the benchmark FTSE 100.
Investor confidence in British assets sits on the edge of a precipice ahead of new finance minister Kwasi Kwarteng’s fiscal update on Friday, according to a Reuters poll earlier this week.
“The MPC expects the fiscal messages to be announced by the government tomorrow to be inflationary over the medium term and it is firing a warning shot that if too much is given away, rates will simply be raised higher,” said Stuart Cole, head macro economist at Equiti Capital.
Capping some of the losses on the commodity-heavy FTSE 100, mining stocks such as Glencore, Rio Tinto and Anglo American rose between 1.1% and 1.5% as metal prices gained on a weaker dollar and optimism that stimulus measures would boost demand in top metals consumer China.
The domestically focussed FTSE 250 declined 1.3% underperforming its export-heavy peer.
Travel and real estate stocks dropped 2.5% and 3.0%, weighing on the mid-cap index.
JD Sports fell 5.5% after UK’s biggest sportswear retailer reported lower profit for the first half.
(Reporting by Bansari Mayur Kamdar in Bengaluru; editing by Uttaresh.V, Sriraj Kalluvila and Anil D’Silva)