Bank of England's Aggressive Rate Hike Triggers Turbulence In European Stocks: Will The Fed Follow Suit In July?

The Bank of England caught markets off guard by enacting an unexpected 50-basis-point hike in its policy interest rate to 5% Thursday, marking the 13th consecutive increase and bringing the cost of borrowing to the highest since 2008.

The BoE noted that second-round effects on domestic wages and prices are likely to take longer to unwind than they did to emerge, and also stated the full impact of bank rate rises will take some time due to the large share of fixed-rate mortgages.

The BoE signaled a hawkish posture by implying future rate hikes if inflationary pressures remain and stoking concerns about a new wave of synchronized rate hikes by major central banks. Traders now price in the terminal rate at 6.05% in February 2024, compared to 5.9% before the BoE meeting.

The Fed meets in a little more than a month, and traders now assess a 72% probability of a 25-basis-point increase in interest rates in July.

Chart: UK Interest Rates Jump To The Highest Since 2008

Market Reactions: European Stock Market Tumbles

Thursday saw European shares suffering losses, with major indices trading in negative territory. On the other hand, the both the pound and the euro were steady against the dollar.

• The UK FTSE 100 fell nearly 1% to 7,482 levels.
• U.K. banks trended lower, with Barclays PLC BCS, HSBC Holdings PLC HSBC and Lloyds Banking Group PLC LYG down 2.8%, 1.8% and 1.6%, respectively.
• U.K. energy stocks were also weaker, with BP PLC BP and Shell PLCSHEL down 1.2% and 1%, respectively.
• The Euro Stoxx 50 Index, which includes the 50 largest European companies, declined 0.7%, with banks being the weakest link. BNP Paribas BNPQF and ING Groep NV ING both fell 2%.

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