FTSE 100 falls as 6% interest rates weighed

The FTSE 100 felt the pain of millions of households across the UK on Wednesday as hotter-than-expected inflation spelt trouble for mortgage holders and highlighted the ongoing pressure on household budgets.

The FTSE 100 was trading down 0.25% to 7,549 at the time of writing.

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UK inflation for May came in at 8.7%, much higher than the 8.4% estimated by economists. Higher inflation means the Bank of England will have to maintain its hawkish stance and push on with increasing borrowing costs.

“Markets had been erring on the side of caution when it came to pricing in how quickly UK inflation is falling, but the news that there’s been no change in the headline CPI rate will send something of shiver through even the hardiest spectator,” said Danni Hewson, AJ Bell head of financial analysis.

“Inflation had been expected to fall – at least a bit – but it hasn’t obliged, remaining stubbornly sticky and cementing the prospect of a rate rise tomorrow as well as raising expectation that the hike will be higher than had been previously anticipated.”

Traders are now pricing interest rates as high as 6.2% before the end of the year. 

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The Bank of England’s commentary released alongside the interest rate decision tomorrow will be pored over for hints of the future rate trajectory. It is a near certainty the Bank of England will hike by 0.25% to 4.75% at midday tomorrow. 

Pound weakness

The recent GBP/USD rally appears to have priced in higher interest rates, and traders booked profits as UK economic uncertainty increased.

The weaker pound supported overseas earners and offset some losses in UK domestically facing shares.

The FTSE 100’s top risers included BP, Shell and CRH.

FTSE 100 movers

The FTSE 100 is typically driven by overseas economies such as China, with the UK economy having little impact on its performance. Not so today when the focus was on domestic sectors and the impact of higher rates. 

Housebuilder shares were the most obvious victim of today’s inflation data, and the threat of higher mortgage rates sent Persimmon, Taylor Wimpey and Barratt Developments sharply lower.

Berkeley Group Holdings was down over 3% despite releasing upbeat full-year results on Wednesday.

Even banks that benefit from higher interest rates are now being consumed by concerns about the health of their mortgage businesses.

Deterioration in economic conditions may force UK banks to increase provisions for bad debts and eroded profits in the coming quarters. 

NatWest was down 3.4%, while Lloyds dipped 1.7%.

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