Updated: The FTSE 100 sank 2.6% and sterling tumbled as the Bank of England hiked interest rates to a 13-year high of 1.25% as it tries to halt soaring inflation.

The blue-chip index spiralled 192 points lower, nearing the 7,000 threshold at 7,081 after the monetary policy committee (MPC) decided not to follow the US Federal Reserve and accelerate the pace of rate hikes, sticking with the expected 0.25% rise.

Sterling extended this morning’s losses, slumping 1% to trade at $1.2053 against the dollar. That hurt the more domestically focused FTSE 250, which lost 2.7%, or 522 points, to trade at 18,793.

The latest move by the Bank comes as inflation hit a 40-year high of 9% in April. Policymakers now expect it to peak at 11% in October, putting them under increasing pressure to balance bringing inflation in check with preventing the country from tipping into recession.

The Fed has already expedited the path of interest rate rises in the US, raising the cost of borrowing by 0.75 percentage points yesterday, instead of the previously expected 0.5. But an immediate increase to 1.5%, or a half-point jump, in the UK was only favoured by a minority of MPC members, who voted 6-3 for the latest increase.

Nicholas Hyett, an investment analyst at Wealth Club, said sterling was making a big impact on markets, with the pound at its weakest against the dollar since the pandemic first struck.

‘With lower sterling driving up import costs and feeding through into already high inflation, the Bank had no option but to keep rates moving forwards – the only question was by how much,’ he said.

‘In the event, a 0.25-point rise is slightly slower than some had expected, although interest rates are still the highest they have been since 2009, and sterling has suffered as a result. Clearly, the bank sees greater risk in suffocating economic growth than it does in inflation, at least in the short term.’

Property-related stocks and retailers, which led markets lower this morning, extended their losses.

Shares in property company Persimmon (PSN) shed 8.3% to reach £20.11 while the biggest faller among the mid-caps was Hammerson (HMSO). The shopping centre owner lost 10.6% to trade at 20p, hit with a double-whammy of higher borrowing costs and a reduction in the amount of money that consumers have to spend at its shopping outlets. Property investor Shaftesbury (SHB) also weighed on the FTSE 250, slipping 9.7% at 525p.

Among FTSE 100 names, JD Sports (JD) was down 7.2% at 103p and Next (NXT) lost 4.8% to trade at £57.48, while mid-cap Frasers (FRAS) lost 8.8%, Tui (TUI) was down 6.9%, and Currys (CURY) lost 6.8% on the expectation rising costs will stop consumers purchasing holidays and expensive electrical items.

Maike Currie, head of personal finance at Fidelity International, said while the Bank has opted for a more cautious approach than the Fed, despite the UK economy shrinking in April, there were questions over whether ‘a rise in rates will affect the prices that are squeezing consumers, as these are being driven by global forces beyond the control of domestic central banks’.

‘In the UK, the expectation is that rates will continue rising steadily until the end of the year to around 2% in order to get on the top of inflation which is behind the most serious cost-of-living crisis in 40 years,’ she said.

10.01am: FTSE sinks and pound hit ahead of Bank meeting

The FTSE 100 tumbled 1.6% and sterling lost ground ahead of the Bank of England’s interest rate decision, with nervousness over whether it will follow the US Federal Reserve and hike more quickly.

The blue-chip index slid 120 points to 7,152 this morning, giving back gains made yesterday, after the Fed unveiled its largest interest rate increase in 28 years. Global markets rallied as the central bank confirmed the widely expected increase of 0.75 percentage points but UK equities were on the back foot as Threadneedle Street prepared to make its announcement.

Richard Hunter, head of markets at Interactive Investor, said market consensus was for a 0.25% interest rate increase today but ‘inevitably the Fed’s decision to move the dial more quickly has led to speculation that the increase could be one of 0.5%’

‘Having been one of the first central banks to move in an attempt to quell inflation, the monetary policy committee may not see the need for the higher hike, even if several of its members previously voted for a more aggressive increase,’ he said.

Hunter said investor interest will turn to sterling, which was down 0.7% to trade at $1.209 against the dollar this morning following a strong showing yesterday.

He said the currency has ‘been under some pressure of late, not least because of the forecast of likely tepid growth, and with a potential spat with the European Union also weighing’.

‘Such pressure could be an ironic boost for the FTSE 100, where the majority of earnings come from overseas, thus making them more valuable in the translation back into sterling,’ said Hunter.

Housebuilder Persimmon (PSN) led the blue chips lower, shedding 7.9%, or 173p, to trade at £20.22, as interest rate rises could put pressure on the buoyant housing market.

Retailers also suffered as higher borrowing costs mean consumers will have less cash to spend in the shops: JD Sports (JD) was down 6.6%, or 7p, at 103p, while Next (NXT) fell 5.6%, or 344p, to trade at £56.98.

The FTSE 250 was weighed down by sterling and jittery investors, losing 1.5%, or 303 points, to reach 19,011.

Like the main index, property took a hit, with real estate investment trust Shaftesbury (SHB) leading the mid-caps lower. Its shares shed 8.4%, or 49p, to reach 533p. Retailers were also suffering, with Sports Direct owner Frasers (FRAS) losing 7.9% to change hands at 596p and electrical goods retailer Currys (CURY) down 6.1% at 69p.

Trusts stumble

It was another difficult day for investment trust holders toughing out the bear market.

In the FTSE 100, the widely held Scottish Mortgage (SMT ) slid another 4.6% to a 25-month low of 701.4p. Private equity giant 3i Group (III ) retreated 4.2% to £10.51.

Outside the top 100, a variety of growth funds led the fallers: Baillie Gifford European Growth (BGEU ) gave up 4.8% to 79.9p, UK smaller companies trust BlackRock Throgmorton (THRG ) slid 5.6% to 543p, Fidelity China Special Situations (FCSS ) shed 3.9% to 258.2p, and Augmentum Fintech (AUGM ) dropped 4.8% to 101.9p.