European stocks fell in the red on Thursday as investors await the Bank of England’s interest rates decision and digest the Federal Reserve’s biggest interest rates increase in 28 years.
The FTSE 100 (^FTSE) tumbled 1.6% after the opening bell, France’s CAC (^FCHI) was 1.5% lower and the DAX (^GDAXI) declined 1.9% in Frankfurt.
The Bank of England (BoE) is poised to deliver a fifth interest rate hike in a row on Thursday, with officials on the Monetary Policy Committee (MPC) expected to stick to a steady path a day after the Fed announced its largest interest rate rise since 1994.
Analysts expect the central bank’s nine policy makers will lift the key rate from 1% by a quarter point to a 13-year high of 1.25%.
Read more: Bank of England set to raise UK’s interest rates to 1.25%
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Worries have been rising that inflation could become too hot to handle for the Bank of England, given that the UK economy is already shrinking and is sorely lacking the insulation needed to protect itself from the impact of rate rises.
“The overall expectation is that it’ll keep the rate rise to 0.25% but given the harder line stance taken by the Federal Reserve, some policymakers may decide to swallow the bitter pill sooner rather than later and vote for a steeper hike of 0.5%.”
“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.”
The pound (GBPUSD=X) fell in early trade, down 0.7% against the dollar to $1.208. Against the euro (GBPEUR=X) it was down half a eurocent at €1.16.
Across the Atlantic, US benchmarks rallied as the Fed took hawkish action to curb 40-year high inflation. The rally saw indexes shake off sessions of downturns that led to a bear market on Tuesday.
Wall Street’s S&P 500 (^GSPC) advanced 54.51 points, or 1.5%, to 3789.99. The tech-heavy Nasdaq (^IXIC) surged 2.5%, while the Dow Jones (^DJI) added 1% after the closing bell.
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.
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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.
Watch: Fed rate hike “shows very strong commitment to tame inflation”, says former Fed official
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