Updated: While UK shares shook off the Bank of England’s biggest interest rate rise in 27 years, the pound slipped sharply in the wake of a warning about a bleak winter marked by recession and high inflation. 

The FTSE 100 was up 0.3%, or 22 points, at 7,468 at 1pm as the Bank hiked the base rate by 0.5 percentage points – its largest jump since 1995 – to take it to 1.75%. However, sterling proved more volatile, rapidly reversing morning gains to trade down 0.5% at $1.208 against the dollar. 

While the rate rise had been widely anticipated, equity markets were stoic in the face of the Bank’s warning that inflation will hit 13% as the UK enters a recession in the final months of this year, ushering in a concerning ‘stagflation’ scenario. 

‘The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the UK and the rest of Europe,’ said the monetary policy committee.

‘The UK is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.’

Hugh Gimber, global market strategist at JP Morgan, said the hike was ‘no surprise to markets’ as policymakers led by the Bank’s governor Andrew Bailey put their inflation-fighting credentials first and foremost. 

‘The Bank faced an unenviable set of circumstances. A 50-basis-point hike appears the appropriate course for the economy despite the risks to the growth outlook,’ he said.

Tim Graf, State Street’s head of macro strategy for the EMEA region, said the Bank did not surprise by its actions so much as by what it said.

‘Forecasting a deep and lasting recession coupled with such a sharp rise in rates is a bold step, confirming that the priority remains getting inflation and inflation expectations under control, regardless of the cost,’ he said.

The strategist expects another 50-basis-point hike that is ‘fully priced for the September meeting will be delivered’, as well as further sterling weakness, noting: ‘[The pound] remains a currency we favour selling on any rallies.’

FTSE 100 stocks, which make about three-quarters of their revenue overseas, were broadly supported by the weaker pound. Gambling group Entain (ENT) was the biggest riser, up 5.6%, or 70p, helping drag peer Flutter (FLTR) 2.9% higher to £86.

Despite the potential for a recession to damage commodity demand, mining stocks were up. Glencore (GLEN) added 3.2% to trade at 460p, Fresnillo (FRES) added 2.6% to change hands at 694p, and Anglo American (AAL) was up 2.3% at £28.44.

The FTSE 250 rose 0.6%, or 127 points, to 20,146 despite the more domestically focused index’s constituents being more exposed to a coming downturn in the UK economy. Convatec (CTEC) continued to sit at the top of the mid-cap index and was joined by gambling stock 888 (888), which added 7.1% to trade at 159p.

Pantheon leaps

Among investment companies, Pantheon International (PIN ) jumped 3.5% to 272.7p after the private equity trust unveiled a record 31% annual investment return and said it would ‘actively’ use share buybacks to narrow its wide 43% discount to net asset value.

JLEN Environmental Assets (JLEN ) gained 2.2% to 128.8p on an 8% premium as high energy prices and inflation boosted its portfolio by another 6.8% in the second quarter.

Premier Miton Global Renewables (PMGR ) added 2.2% to 188p on a 13% discount after posting a 3.1% half-year drop in asset value.

NB Global Monthly Income (NBMI ) firmed 1.1% to 79.9p on a 5% discount as its two-thirds weighting to floating rate loans benefited from the Bank of England’s hike to interest rates.

Target Healthcare Reit (THRL ) rose 1% to 116.6p as the inflation linked care home portfolio reported a 2% total investment return in the second quarter.

(10:23am) FTSE hesitant ahead of rate decision

The FTSE 100 struggled for direction ahead of the Bank of England’s interest rate decision later as it stands on the brink of the biggest hike since 1995.

The blue-chip index was flat at 7,443 in early trading, while the pound strengthened.

It is widely predicted the base rate will increase by 50 basis points – the biggest jump in 27 years – to 1.75% as the Bank scrambles to contain soaring inflation. That would also mark the largest single lift to borrowing costs since the Bank gained independent control of interest rates a quarter of a century ago. 

Sterling was higher this morning ahead of the announcement, pushing up 0.2% to trade at $1.217 against the dollar.

Georgina Taylor, a multi-asset fund manager at Invesco, said: ‘This macro environment is a test for all central banks to prove two things: first, that they have not already made a policy mistake; and second, that they actually have the toolkit available to tackle inflation.’

She added that central bank credibility was ‘at stake’ and warned ‘risk assets may struggle to make meaningful progress while this central bank debate continues’. 

Next (NXT) was a top riser on the FTSE, moving up 3.1%, or 212p, to £69.58 after enjoying a surprise sales jump as the heatwave and the summer wedding season encouraged shoppers. The business reported a 5% lift in full-price sales in the past three months, with second-quarter group sales pushing past expectations by £50m, allowing the retail giant to lift full-year profit guidance by £10m to £860m.

Richard Hunter, head of markets at Interactive Investor, said the update delivered what has become a regular feature of Next updates: ‘An upgrade to profit forecasts along with a cautionary outlook to temper overexuberance’.

‘The continued growth has enabled shareholder returns to be maintained as the company runs a tight ship on policy,’ he said.

‘In the year so far, Next has completed share buybacks totalling £224m. At the same time, the historic yield is 1.9%, turbocharged by previous special dividends to 5.9%.’

The biggest faller this morning was Hikma Pharmaceuticals (HIK), whose shares fell 8.5%, or 151p, to £16.11 after lowering annual guidance following a tough first half in which it took a hit from a competitive generics market.

Mondi (MNDI) lost 5.1% to trade at £15.27 despite the paper and packaging group reporting a sharp rise in profits on the back of higher prices as the cost of timber rose.

The more domestically focused FTSE 250 benefited from a rise in the pound, with the mid-cap index ticking up 0.6%, or 115 points, to 20,133.

Medical products and technology group Convatec (CTEC) was up 6.2%, or 14p, at 244p – a one-year high – after announcing strong first-half results and confirming its full-year outlook, with operating margins of at least 18%.

Package holiday operator Tui (TUI) was up 3.9% at 141p despite cancelling Sri Lanka flights on the back of Foreign Office advice. This week, the company sought to dispel holidaymakers’ fears about Spanish travel entry rules this summer, denying travellers would need to confirm proof of finances when entering the country.