FTSE muted as Bank of England raises interest rates

View of the financial district in London. The FTSE  trading higher on the day
The FTSE was higher on Thursday after the Bank of England's decision on UK interest rates. Photo: REUTERS/Yann Tessier

The FTSE 100 (^FTSE) was treading water on Thursday as traders digested the latest news on UK interest rates from the Bank of England (BoE).

London's benchmark index gained just 0.1% on the day, while the CAC (^FCHI) advanced 0.5% in Paris, and the DAX (^GDAXI) was also 0.5% higher in Frankfurt.

It came as Threadneedle Street hiked UK interest rates by 50 basis points to 1.75% as it looks to combat runaway inflation, which it predicts will hit 13% later this year.

Read more: Bank of England announces biggest interest rate hike in 27 years

It marks the sixth consecutive increase, and biggest interest rate hike in 27 years since the Monetary Policy Committee (MPC) was set up back in 1997. Interest rates are now at their highest level since December 2008.

The MPC voted 8-1 on Thursday, with Silvana Tenreyro the lone dissenter, voting for a smaller rise to 1.5%.

The Bank now expects inflation to peak to 13% before the end of the year — well above its 2% target — and for it to remain elevated in 2023.

It has also predicted that the UK will fall into recession in the last three months of this year, as well as contracting through next year. Lasting for five quarters, this would be the longest recession since after the 2008 financial crisis.

"The Bank of England is playing catch up after some bumper rate rises from the ECB and Federal Reserve in the last month," Nicholas Hyett, investment analyst at Wealth Club, said.

"The resulting rate hike may be the largest in nearly 30 years, but it was also widely expected, and the market reaction has been modest. Instead, the real focus today is on how much further the bank is willing to go as it seeks to bring inflation back down to its 2% target."

He added: "Stronger sterling has the potential to provide some relief. However, rising rates in the US and Europe mean the BoEs actions haven’t helped the pound much, and sterling is currently trading near its weakest level against the dollar in over 40 years.

The risk now is that higher interest rates start to squeeze consumer and commercial borrowers too much, strangling the life out of the economy without significantly easing the cost-of-living crisis."

Read more: How Bank of England’s interest rate rise will affect mortgages and house prices

Across the pond on Wall Street, the S&P 500 (^GSPC) dipped 0.2% and the tech-heavy Nasdaq (^IXIC) fell 0.3% by the time of the European close. The Dow Jones (^DJI) edged 0.3% lower.

It came as initial claims for unemployment insurance totalled 260,000 last week, in line with estimates, and a gain of 6,000 from the previous week’s downwardly revised level, the Labour Department reported Thursday.

Elsewhere, the US trade deficit in goods and services decreased to $79.6bn in June, down $5.3bn and slightly lower than the estimate for $80bn.

Asian stocks rose overnight, taking their cues from a strong rally on Wall Street after robust economic data and upbeat corporate guidance boosted investor appetite.

In Tokyo, the Nikkei (^N225) climbed 0.7% while the Hang Seng (^HSI) surged 1.9% in Hong Kong, with an index of its tech stocks surging 2.3%.

The Shanghai Composite (000001.SS) gained 0.8% on the day.

Watch: How does inflation affect interest rates?