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FTSE 100 closes 1% lower as BoE hikes interest rates

Last updated: 16:41 22 Sep 2022 BST, First published: 07:02 22 Sep 2022 BST

recession
  • FTSE 100 closes down 78 points
  • Hargreaves Lansdown falls as it goes ex-div
  • JD Sports Fashion disappoints

4.41pm: FTSE closes in red

FTSE 100 closed over 1% lower on Thursday as the Bank of England, like other central banks, stepped up the fight to combat inflation by lifting interest rates.

The UK's index of leading shares finished down around 78 points, or 1.08%, at 7,159.52.

"Today has seen another bout of downside for stock markets throughout Europe and the US, with geopolitical and economic concerns providing a drag on risk assets once again," said Joshua Mahony, senior market analyst at IG.

"On a week dominated by central banks, it was always going to be difficult to envisage a scenario where traders emerge with a positive outlook," he added.

"Volatility has come from a variety of sources, with the aftereffects of yesterday’s FOMC monetary policy meeting coming into play alongside a Russian nuclear war warning, BoJ JPY intervention, and a BoE rate decision."

3.45pm: Busy day set to end on a downbeat note for Footsie

Leading shares remain firmly in the red heading into the close, despite a slight respite at lunchtime as the Bank of England unveiled its smaller than expected interest rate rise.

With all three main US indices in negative territory, the FTSE 100 is currently down 66.7 points or 0.92% at 7170.94, not far off its low for the day of 7158.

The pound has picked up a little again and is up 0.287% against the dollar at US$1.1286.

Michael Hewson, chief market analyst at CMC Markets UK, said: "The battle against inflation was taken up a notch further today as we saw the Swiss National Bank, Bank of England, and the Norges Bank, follow the Federal Reserve’s lead last night, and raise interest rates, while we also saw intervention from the Bank of Japan in defence of the Japanese yen.

"In the aftermath of last night’s negative US session, European markets opened sharply lower and while they tried to recover off the lows of the day, the continued rise in yields has contrived to keep the pressure on the recent lows, as downward pressure continues to prevail."

Among the fallers JD Sports Fashion PLC (LSE:JD.) is down 6.66% as its results disappointed investors, while Hargreaves Lansdown PLC (LSE:HL.) has fallen 6.3% as its shares went ex-dividend.

Property companies were out of favour, with British Land Company PLC (LSE:BLND) off 4.4% and Land Securities Group PLC (LSE:LAND) 4.1% lower.

But a couple of miners managed to edge higher in the wake of firmer commodity prices, with Rio Tinto PLC (LSE:RIO) rising 1.99% and Glencore PLC (LSE:GLEN) up 09%.

3.15pm: Government ditches National Insurance rise

The UK's mini-budget appears to have started a day early.

The Chancellor Kwasi Kwarteng has announced that the 1.25 percentage point rise in National Insurance, which began in April, will be reversed from 6 November.

The government says scrapping the tax will save businesses nearly £10,000 a year on average, while around 28 million people will keep an extra £330 a year on average.

2.54pm: Wall Street sees a mixed start to trading

The major US indices opened mixed, as traders reacted to layoffs in the American job market.

At the opening, the Dow Jones Industrial Average was up 0.09% to 30,206, the S&P 500 was down by 0.03% at 3,787, while the Nasdaq Composite was down by 0.17% at 11,200.

Ian Shepherdson, chief economist with Pantheon Macroeconomics, said initial claims rose to 213,000 for the week ending September 17 from a downwardly revised 208,000, but below the consensus of 217,000.

“We expected a clear jump in claims this week, on the grounds that last week’s unexpected drop to 213K was a pre-Labor Day distortion. The mere 5,000 increase in today’s report is not definitive evidence that the trend in claims has dropped further, but we are now very keen to see next week’s report. Four straight sub-220,000 prints would be quite compelling,” Shepherdson said in a statement.

Shepherdson noted that the US Federal Reserve is using the strength of the US labour market as the reason for raising interest rates, including its three most recent 75 basis point hikes.

“For a Fed looking for signs of a softer labour market, the recent numbers will not be comforting, though they say nothing about the pace of gross hiring; claims are just a proxy for the pace of gross firings,” he said, adding payrolls are the difference between the two.

“It’s possible that the bar for layoffs remains very low even as firms gradually scale back hiring plans, but the Fed has made it abundantly clear that it wants a materially softer labour market, and we’re not sure labour demand has slowed enough to bring that about without at least some increase in layoffs,” Shepherdson said.

Back in the UK and the FTSE 100 has gone firmly into reverse again, down 34.58 points or 0.48% to 7203.06.

Meanwhile sterling has lost most of its gains against the dollar, up just 0.02% to US$1.1256.

2.40pm: Turkey cuts rates again

Meanwhile with central banks raising rates around the world, Turkey is again a bit of an outlier.

The country's bank cut rates by another 100 basis points today despite inflation sitting above 80%, and unsurprisingly the lira hit a new record low against the dollar.

Craig Erlam at Oanda said: "You have to wonder what it will take for the central bank to accept that its experiment - at the worst possible time - has failed but clearly, we're not nearly at that point. More pain to come, it seems."

2.35pm: Bank forecasts second successive quarter of GDP decline

The UK could already be in recession, the Bank of England has said as it raised interest rates for the seventh time.

After a 0.1% drop in GDP in the three months to June, the Bank now believes the current quarter could see a further 0.1% decline.

Two successive quarters of falling growth are technically a recession.

This contrasts with the Bank's August report, when it was projecting 0.4% growth for the third quarter.

The Bank said the expected fall would " in part, reflect the smaller-than-expected bounce back in growth following the bank holiday in the second quarter and the expected impact from the additional bank holiday in September for the Queen’s state funeral."

Craig Erlam, senior market analyst at Oanda, said: "The Bank of England raised rates by 50 basis points today; a move some may view as a little conservative under the circumstances. Of course, that's an accusation that's been levelled against the MPC a lot this year as it proceeded with 25 basis point hikes while others were accelerating them.

"But without the benefit of new economic projections and details of tomorrow's mini-budget, the decision is that much harder as was evident from the vote split.

"Perhaps the BoE will regret passing up another opportunity to ramp up the pace of tightening, with inflation now seen peaking just below 11% in October and remaining in double-digits for a few months after.

"But with the economy potentially already in recession, the Bank - like many others - finds itself between a rock and a hard place.

1.55pm: Bank's job "becoming more challenging"

More on the Bank's rate rise, and David Goebel, associate director of investment strategy at wealth manager Evelyn Partners, says the MPC’s job is becoming ever-more challenging.

He said: ‘As well as inflation at its highest for a generation and faltering expectations for economic growth, the Bank has a new political administration to consider.  Liz Truss’ government is set to be very expansionary in fiscal terms, in an attempt to boost growth, with a few specifics of its economic policy revealed at Chancellor Kwasi Kwarteng’s “fiscal event” tomorrow.  While the Bank’s primary mandate is to maintain price stability – i.e. control inflation - without a full view of policy direction it makes decision making difficult given the potential impact on consumer finances and spending.

‘A policy that has been announced which will have impacted the Bank’s decision making today is the Energy Price Guarantee. The scheme, expected to cost as much as £150bn, caps the unit cost of energy to end users.  While this cap is at levels of approximately double what prices were a year ago, it will be a welcome development to both consumers and businesses.  It will also serve to limit peak consumer price inflation, which it had been driving.  Bloomberg Economics estimate that, as a result, peak levels of Consumer Price Inflation should now be at 10.5% in October, rather than 15% in January as per their previous estimate. 

‘This on the face of it is welcome news for the consumer and the Bank, but the shortfall in energy prices will be financed by government spending, which will result in higher levels of borrowing.  This increased level of borrowing has already seen the cost of debt increase significantly."

Meanwhile the FTSE 100 is now virtually flat, down just 1.37 points at 7236.27.

And on the currency markets, the pound has also regained some ground.

It is now up 0.7442% at US$1.1337.

1.45pm: US jobless claims beat forecasts

Over in the US, weekly jobless claims have come in better than expected.

The number of Americans claiming unemployment benefit for the first time was 213,000 last week, compared to forecasts of a figure of 217,000.

The previous week's figure was revised down by 5,000 to 208,000.

12.39pm: Timid or balanced move from the Bank?

Some reaction to the rate rise.

Ed Hutchings, head of rates at Aviva Investors, said: "With financial markets at the margin expecting a hike of 0.75%, the decision to do 0.50% but to begin quantitative tightening in October feels somewhat more of a balanced outcome for financial markets.

"However, given the backdrop of fiscal tailwinds, strong employment data and inflation yet to fall, I would expect both gilt yields and sterling to remain somewhat unloved for the foreseeable."

Victoria Scholar, head of investment at interactive investor, said: "Today’s announcement suggests the Bank of England is concerned about the UK’s economic deteriorating outlook amid the looming threat of recession. The central bank’s decision was more dovish than markets expected, particularly following the Fed’s hawkish 75-basis point rise yesterday and the recent depreciation for the pound.

"The timid increase will do little to stem the slide in sterling but may avoid inadvertently inducing unnecessary pain for the economy which is already grappling with slowing demand and deteriorating confidence.”

Naeem Aslam, chief market analyst at Avatrade, said: "The BOE has declared it is still willing to fight against all odds and it will only increase interest rate dovishly. Yes, a 50 basis point interest rate hike is a dovish move. However, the devil is always in details and that is more and more members are thinking of increasing rates by 75 basis points and this means that the next interest rate hike will still be a mystery...

"The BOE has big problems to deal with as a recession is firmly on the cards and this remains in focus among traders who trade sterling."

12.19pm: Sterling loses some of its dollar gains

The smaller than expected - by some - rate rise from the Bank of England has seen sterling lose some of the day's gains against the dollar.

Ahead of the announcement the pound was up 0.905% against the US currency to US$1.1355.

It has since fallen back to US$1.1287, still up 0.2981% on the day.

The FTSE 100 meanwhile has fallen back again and is now down 26.94 points or 0.37% at 7210.70.

12.13pm: Inflation set to peak at 11%, says Bank

The Bank of England has reduced its inflation forecast in the light of the energy price cap announced by the government.

In August it expected inflation to peak at 13%, but it has cut this foreast to 11%.

It said: "Given the Energy Price Guarantee, the peak in measured CPI inflation is now likely to be lower than projected in the August Report, at just under 11% in October. Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back."

12.10pm: Five of the nine Bank members went for 50 basis points

It was a relatively close call for the Bank's monetary policy committee.

Five members voted to raise interest rates by 0.5 percentage points, three members went for 0.75 percentage points, to 2.5%, and one member preferred to increase the rate by 0.25 percentage points, to 2%.

The committee also voted unanimously to start selling some of the bonds it bought under the quantitative easing programme.

It plans to  reduce its stock of purchased UK government bonds by £80 billion over the next twelve months, to a total of £758 billion, in line with the strategy set out in the minutes of the August MPC meeting.

12.02pm: Bank lifts cost of borrowing but by less than expected

The Bank of England has raised interest rates by 50 basis points to 2.25%, their highest level since November 2008 when rates were being cut amid the financial crisis.

The move comes as the Bank attempts to tackle soaring inflation, which is currently at 9.9% and well above its target of 2%.

It follows a 75 basis point rise from the US Federal Reserve, and comes ahead of Friday's UK mini-budget which is expected to unveil an increase in spending and tax cuts, which will lift government borrowing even further.

This is the seventh consecutive rate hike by the Bank's Monetary Policy Committee, but it is less than the 75 basis point hike some economists had expected.

The Bank has taken notice of the plan by new prime minister Liz Truss to cap energy bills at £2,500 for two years, which should help pull inflation back from the worst forecasts.

The FTSE 100, down around 0.27% before the news, is now off 0.16% at 7226.17.

11.52am: Wall Street set for mixed start after Fed news

US stocks are expected to open flat to lower after the Federal Reserve, as forecast, delivered a 75 basis point  interest rate increase yesterday and signaled that further hikes are likely.

Futures for the Dow Jones Industrial Average were up 0.1% in pre-market trading, while those for the S&P 500 lost 0.1%, and contracts for the Nasdaq-100 were 0.2% lower.

“‘Ugly’ is a good word to describe the market mood this morning. The selloff will likely continue,” said Ipek Ozkardeskaya, senior analyst at Swissquote bank, noting that Wednesday’s falls are likely to deepen.

Equities initially took the Fed’s widely expected decision to deliver its third successive 75 basis point interest rate hike in their stride, but Fed chairman Jerome Powell’s hawkish tone in the subsequent news conference led stocks to fall.

 “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Powell was quoted as saying. His words were a stark reminder that more interest rate increases are looming.

Whether the Fed can guide the world’s biggest economy to a so-called soft landing remains to be seen but for now, Powell’s words highlight that rate-setters are focused on fighting inflation which remains stubbornly around 40-year highs.

Ozkardeskaya noted that rate-setters projections went well above market expectations. “Most of them favor sending the rates above 4.25% by the end of the year; that means that there must be at least another 75 bp hike on the pipeline.

“Then, if we are lucky, we could end the year with a 50bp hike, which could be followed by a couple of 25bp hikes before the Fed stops and takes a breather,” she added.

Elsewhere, Russia’s renewed determination in its war on Ukraine, spooked markets and reduced appetites to take on risk. Russia’s president Vladimir Putin has declared partial mobilization and the country is preparing to mobilize 300,000 reservists.

“It’s a major escalation of the war, because so far, the Russians deployed around 150-200,000 soldiers. So, sending 300,000 more men is a big deal,” said Ozkardeskaya. “Putin’s announcement, which fell like a bomb on investors who were already stressed out due to the Fed decision, sent capital to safe-haven assets yesterday.”

Some of those outflows are expected to continue today as central banks around the world move to raise interest rates amid spiraling price pressures.

Back in the UK, and ahead of the Bank of England's decision, the FTSE 100 is down 22.76 points or 0.31% at 7214.88.

11.05am: Royal Mail shares sink as dispute with union grows

The dispute between Royal Mail PLC (LSE:RMG) and its union appears to be escalating.

The firm wants to end some of its historic agreements with staff, saying it has reached no agreement with the Communication Workers Union on pay and conditions despite five months of talks.

It said it is losing £1mln a day and needs to speed up change.

It said: "As part of this, Royal Mail will review or serve notice on a number of historic agreements and policies which are currently being used by the CWU to frustrate transformation, and intends to move to a more modern industrial relations framework designed to make the business more agile, and able to compete more effectively."

It added: "These changes are important steps towards modernising the industrial relations framework. They will allow Royal Mail to move from a system where the CWU has many powers to veto and block change, to a more consultative relationship."

It also wants to take talks to arbitration service Acas.

The CWU called the plan to end the agreements "an all-out attack" on the union.

The news has sent Royal Mail shares down 3.6% to a two year low of 207.17p.

Overall the FTSE 100 remains in the red, down 26.10 points or 0.36% at 7211.54 as investors await the Bank of England's interest rate decision.

10am: Japan acts to support yen

Japan has moved in the currency markets to support the yen against the strong dollar.

Vice finance minister for international affairs Masato Kanda said: "We have taken a decisive action (in the currency market)."

The US currency remains a haven in times of uncertainty, and had also been supported by the latest interest rate rise and hawkish Federal Reserve comments.

Michael Hewson at CMC Markets UK said: "The Bank of Japan has intervened in the currency markets this morning, only this time rather than rate-checking the USD/JPY rate they actively intervened by selling US dollars for the first time since 1998.

"Today’s move came only hours after the central bank left its own monetary policy unchanged in the face of a rising inflation rate, albeit at a much lower rate of 3%.

"The failure to show any active sign that it was going to alter its monetary policy settings was taken as a green light by traders to push the US dollar to a new 24 year high above the 145.00 level, to a new peak of 145.90...

"This morning’s aggressive action certainly appears to have caught the markets unawares, sending the US dollar sharply lower.

"The big question is whether it will make a difference and change the long-term direction of the Japanese yen’s decline."

9.42am: Investors await Bank of England decision

More central bank decisions.

Norway's Norges Bank has raised rates by 50 basis points to 2.25%, while the Swiss National Bank has followed the Federal Reserve's lead with a 75 basis point increase to 0.5%, ending a period of negative rates

Ahead of the Bank of England's own decision, Neil Wilson at Markets.com said: "Markets anticipate the Monetary Policy Committee will vote to raise rates by 50bps to 2.25%, but there is a strong chance they choose to go bigger, particularly in the wake of the recent moves by the Fed and European Central Bank.

"The BoE is in an invidious position but it has to take the Fed’s lead and be prepared to inflict pain; compared with persistently high inflation, a short-term recession is the lesser of two evils. Markets are now pricing rates at 5% by September next year and I fail to see how the BoE can stop until inflation regains its anchors. Gradualism is being replaced with a more forceful attitude to tightening monetary policy. It’s important too that the BoE acts with sterling in mind."

The pound has recovered a little against the dollar after falling to a new 37 year low, and is now up 0.7309% at US$1.1336.

Meanwhile the yield on UK two year gilts has risen to 3.4%, the highest level since autumn 2008, as investors sell government bonds amid recession fears.

As for the FTSE 100, it is continuing its revival and is now down just 6.37 points at 7231.27.

8.52am: Footsie recovers some ground but still in the red

The selling has eased a little but the leading index is still firmly in the red.

The FTSE 100 is currently down 36.51 points or 0.5% at 7201.13.

European markets are also heading lower in the wake of the hawkish comments from the US Federal Reserve. Germany's Dax is down just over 1% while France's Cac is off 1.17%.

Back in the UK, Hargreaves Lansdown PLC (LSE:HL.) is the biggest faller in the blue chip index, down 5.03% as its shares went ex-dividend.

JD Sports Fashion PLC (LSE:JD.) has dropped 3.96% after it reported lower half year profits, down from £364.6mln to £298.3mln.

And hotel groups are out of favour, with Intercontinental Hotels Group PLC (LSE:IHG) 2.94% lower and Premier Inn owner Whitbread PLC (LSE:WTB) falling 2.73%.

8.11am: Shares fall and pound under pressure

Leading shares have slumped in the wake of Wall Street's falls following the hawkish Federal Reserve comments and ahead of the Bank of England's own rate decision at midday.

Many expect a 75 basis point rise from the Bank but Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said it could opt for 50: "Yes, increased spending from Liz Truss government is no good for inflation, but, because the [announced] £40 billion energy package aims to tame inflation – and it certainly will, the BoE could take it easy on the rate front."

Even so this will take rates to their highest level since November 2008 amid the financial crisis.

The monetary policy committee will also have to take into account the mini-budget tomorrow which is expected to unveil hefty spending plans, including tax cuts.

Ozkardeskaya said: "The BoE is also expected to announce quantitative tightening, but the effect of QT will certainly remain under the shadow of huge sums that Truss government is preparing to spend. On top of the energy spending, there could be a £30 billion tax cuts, and also a stamp duty cut. It is said that the Chancellor of Exchequer will certainly need a bigger box to finance all that.  

"What does it mean for the markets? It means that the UK gilts will probably further dive, and the sterling will end up hitting parity against the US dollar."

The Bank has at least had the chance to digest the Fed's comments - originally the UK central bank was due to announce last week before its US counterpart, but the meeting was postponed due to the period of mourning for the Queen's death.

As well as the focus on central banks, there also continue to be jitters following the aggressive comments from Russian president Putin and the mobilisation of troops he announced.

So the FTSE 100 is down 69.97 points or 0.97% to 7167.67 in early trading, more than wiping out Wednesday's gains.

And on the currency markets the pound fell as low as US$1.1212 this morning but has recovered a little to US$1.122, still down 0.299% and a new 37 year low.

7.00am: FTSE set for hefty losses at the open

The FTSE 100 is expected to open sharply lower following heavy falls in the US after the Federal Reserve slashed economic growth forecasts as it raised interest rates by 75 basis points once again.

Investors will be looking to see if the Bank of England follows a similar path today when it makes its interest rate announcement, with markets expecting at least 50 basis points with 75 a distinct possibility, the biggest rise for 33 years.

Spread betting companies are calling London’s blue-chip index down by 60 points.

US markets ended a see-saw final couple of hours sharply lower as the Federal Reserve signalled that interest rates would stay higher, for longer, and slashed its forecasts for economic growth for the next two years.

The rate increase of 75bp was as expected but it was the accompanying hawkish remarks and estimates that further spooked the markets.

At the close, the Dow Jones was down 523 points, or 1.7%, at 30,184, the S&P 500 shed 66 points, or 1.7%, to 3,790, and the Nasdaq Composite tumbled 205 points, or 1.8%, to 11,200.

Michael Hewson, chief market analyst at CMC Markets UK, said: "Fed chair Jay Powell [said] that the FOMC were “strongly committed” to driving inflation lower while signalling that more rate rises are on the way. Powell went on to say that there was no painless way to drive inflation lower, with the prospect that we could well see another 100bps by the end of this year at the bare minimum.

"Not surprisingly US equity markets did not like the hawkish tone, as well as the prospect of lower growth and higher inflation, with the Fed altering its guidance on both. US GDP is expected to slow to 0.2% in 2022, with Powell admitting that a recession might be possible. Core inflation is forecast to decline to 4.5% this year, before falling to 2.1% by 2025."

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