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LONDON MARKETS : U.K. Stocks End Sharply Lower As BOE Warns Rate Hike Is Coming

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09/14/2017 | 06:13pm CEST

By Sara Sjolin, MarketWatch

Pound jumps to fresh 2017 high, weighing on equities

U.K. stocks slid and the pound rallied on Thursday after the Bank of England signaled that it's preparing to raise interest rates within months to rein in inflation.

The FTSE 100 index lost 1.1% to end 7,295.39, whacked by the pound leaping to $1.3388, up from $1.3206 ahead of the BOE decision and higher than the $1.3210 recorded late Wednesday in New York. Sterling on Thursday has traded as high as $1.3399, a fresh 2017 peak.

A rising pound tends to hurt the FTSE 100 index, as many of its components make the majority of their earnings outside the U.K.

As expected, the U.K. central bank kept its key interest rate at a record low of 0.25%, but expressed concern about the high level of inflation and indicated policy will soon have to be tightened . Data out earlier this week showed inflation jumped to 2.9% in August, easily overshooting the BOE's target of 2%.

In the minutes from the central bank's meeting, policy makers said that "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target."

The BOE also said that if the economy continues to develop as expected, "then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations."

The BOE is "clearly teeing up a rate rise and wants the markets to prepare for one. Given the economy isn't exactly motoring, the bar for a hike has just been lowered," said Neil Wilson, senior market analyst at ETX Capital, in a note.

"The odds of a hike back to 0.5% this year have just shortened with sterling firming as a result. This should offer solid support for the pound going into the final quarter and means a move below $1.30 is a lot less likely," he added.

According to the Guardian and Bloomberg, traders are now pricing in a 42% chance of a rate increase at the November meeting and 54% probability for December.

The pound is up 1.5% this week against the dollar, and 3.7% higher for September so far, stretching its year-to-date gain against the buck to 8.4%.

Stock movers: Miners posted some of the biggest losses on Monday after the release of disappointing data on Chinese industrial output . China is a major user of natural resources, so any indications of a factory slowdown there tends to hurt the mining sector.

Shares of Rio Tinto PLC (>> Rio Tinto plc) (>> Rio Tinto plc) (>> Rio Tinto plc) dropped 3.4%, and Glencore PLC (>> Glencore) fell 3.3%.

On an upbeat note, shares of Next PLC (>> Next) rallied 13% after the high-street retailer raised its profit and revenue guidance for the full year . Pretax profit, however, dropped 10% in the first half of the year.

Non-listed department-store chain John Lewis also reported a drop in income on Thursday, saying pretax profits more than halved in the first half of the year.

Among other retailers in the U.K., shares of Marks & Spencer Group PLC (>> Marks & Spencer Group) (>> Marks & Spencer Group) added 2.8%, while Primark parent Associated British Foods PLC (>> Associated British Foods) (>> Associated British Foods) put on 0.4%.

House builders were lower after the Royal Institution of Chartered Surveyors published a mixed report on activity in the U.K. housing market (http://www.rics.org/uk/news/news-insight/press-releases/growth-at-the-headline-level-but-regional-house-price-picture-remains-mixed/), saying sentiment is increasingly negative in central London. Shares of Taylor Wimpey PLC (>> Taylor Wimpey) fell 3.7% and Berkeley Group Holdings PLC (>> Berkeley) erased 2.3%.

Outside the FTSE 100, shares of Spire Healthcare Group PLC (>> Spire Healthcare Group PLC) tumbled 19% after the company reported a 75% slump in first-half profit.

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