Borrowing costs up

Stocks plunge on recession fears and rate hike

Bank of England
The Bank of England is fighting inflation (pic: Terry Murden)

London’s blue chips suffered their biggest one-day fall in three months, plunging more than 3% after the Bank of England raised interest rates and cut its growth forecast amid growing assumptions that the UK is now close to recession.

The Bank raised the cost of borrowing from 1% to 1.25% as it tries to control rampant inflation currently at 9% – the highest rate since the 1980s.

This latest hike – a fifth consecutive monthly rise – takes the base rate above 1% for the first time since 2009. It still leaves it at a historically low level, but will add to business and household costs at a time when prices of energy and other bills are going up. Audit, tax and advisory firm Mazars said it would add £929m to UK business costs.

The Bank believes GDP will fall by 0.3% in this quarter, compared to the 0.1% growth it had pencilled in previously, putting the country on the brink of a full-blown recession.

Analysts are increasingly certain that the Bank’s rate-setting monetary policy committee will go further next month, with a 0.5 percentage point rise on the cards. Three of the nine members voted for the larger rise today.

The uplift will add £18 per month to the cost of a £150,000 variable rate mortgage, though most home buyers took out fixed rate deals while money was cheap. The big shock may come if rates remain at this level when those deals end.

The FTSE 100 fell 228.43 points (3.14%) to close at 7,044.98 as investors rushed to sell stocks.

Housebuilders and consumer companies were among the biggest losers on the London Stock Exchange. Persimmon fell nearly 12% while JD Sports was 7.6% weaker.

Laith Khalaf, head of investment analysis, AJ Bell, said: “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.

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“What the Bank is trying to do is head off second order inflationary effects becoming ingrained in the system and taking on a life of their own.”

Ahead of London’s close, Wall Street stocks were firmly in the red in early trade, reversing gains that followed the Federal Reserve’s 75 basis points increase in US interest rates on Wednesday.

It was the largest hike since 1994 and in a statement following its two-day meeting, the Fed said “overall economic activity appears to have picked up after edging down in the first quarter”.

It warned that “inflation remains elevated” and the invasion of Ukraine by Russia had created “additional upward pressure”.

The Fed’s benchmark federal-funds rate will now range between 1.5% and 1.75% and officials said they expected rates to rise to at least 3% this year.

Jerome Powell

Chair Jerome Powell, pictured, said the Fed intends to aggressively increase rates in order to bring prices back under control after some economists had predicted that inflation was peaking in the spring.

Last week the Labor Department sprung a surprise by revealing consumer prices were 8.6% higher in May than they were a year ago – a 40-year high – causing stock markets to plummet.

Wall Street moved higher, after five losing sessions, even through Mr Powell signalled that the central bank could raise rates again by the same magnitude next month.

Stocks would normally react negatively to aggressive central bank measures and the bullish response was attributed to Mr Powell’s cautious stance during the press conference.

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