Global financial markets fell sharply on Thursday as investors braced for central banks driving interest rates up further to combat high inflation across the world’s leading economies.
Share prices fell on both sides of the Atlantic with the FTSE 100 tumbling by 161 points, or 2.2%, to finish the day at 7,280 – its lowest level since last November – while stocks fell by a similar amount across Europe and by more than 1% in New York.
UK government borrowing costs rose further, extending an increase seen in recent weeks amid concern that the Bank of England may need to engineer the conditions for a recession in order to squeeze high inflation out of the British economy.
The yield, or interest rate, on two-year UK government bonds rose by more than 0.1 of a percentage point to about 5.5%, the highest level since 2007. Reflecting the prospect of higher central bank interest rates, US government bond yields rose by a similar amount to just over 5%, while borrowing costs also rose across the EU.
Mining giant Glencore was the top faller on the FTSE 100, with a drop of 5.5%, followed by retail chain Next, copper producer Antofagasta and gambling group Flutter, on a day when just three companies gained in value – Severn Trent, Tesco, and United Utilities.
The day of selling pressure in financial markets came after the US Federal Reserve signalled on Wednesday that “almost all” of its policymakers believed further rate hikes would be appropriate in response to “unacceptably high” inflation.
Figures published on Thursday showed continued strength in the US jobs market in June, which economists said could add to inflationary pressures in the world’s largest economy.
“If a rate hike this month wasn’t already nailed on, it probably is now,” said Craig Erlam, a senior market analyst at the financial trading firm Oanda. “I’m sure everyone will be revising up their expectations on the back of it and wondering just how much longer this labour market resilience can last. How high must rates go?”
Fed officials announced a pause in interest-rate hikes last month, leaving rates at 5% to 5.25% after more than a year of consecutive rate increases.
Financial markets expected the Bank to raise UK interest rates from the current level of 5% at its next policymaking meeting in August, with some economists warning that the central bank could push the base rate as high as 7% in response to sticky inflation in the UK.
However, other economists caution that significant further hikes in the cost of borrowing would push the UK economy into recession, as millions of mortgage holders face a refinancing timebomb as they reach the end of fixed-rate deals.
Andy Haldane, the Bank’s former chief economist, called on the central bank to hold back from raising rates further, suggesting there were growing risks of “overreaction and overcorrection”.
The UK’s annual inflation rate remained unchanged at 8.7% in May. It is falling more slowly than expected and remains the highest in the G7. Inflation is much lower in the US, dropping to 4% in May, while inflation in the eurozone fell to 5.5% in June.
“Rising rate expectations hit FTSE 100,” said Chris Beauchamp, chief market analyst at the online trading platform IG. “Commodity prices are down as the dollar strengthens, but it is the wave of expectations that UK interest rates will go even higher than previously thought that has really done the damage.
“While the calls for rates to hit 7% seem a little overeager, they do have further to go.”
