City frets over steeper Bank of England rate rise after GDP boost in May

A better than expected assessment of the UK economy was not enough to push London’s top indexes higher today.

The capital’s premier FTSE 100 index dropped 0.74 per cent to 7,156.37 points, while the domestically-focused mid-cap FTSE 250 index, which is more aligned with the health of the UK economy, fell 0.76 per cent to 18,711.36 points.

Data published by the Office for National Statistics yesterday revealed the UK economy grew 0.5 per cent in May, much better than the City’s expectations for growth to have flatlined in the month.

The upbeat figures will help ease fears of the UK tipping into a recession soon.

However, traders were less than impressed, instead worrying that the data will encourage the Bank of England to lift interest rates by a steeper increment than usual at its next meeting on 4 August.

Higher borrowing costs weigh on equities by making fixed income assets such as bonds more attractive and curing companies future income prospects.

The GDP bounce eased pressure on the pound. It strengthened 0.43 per cent against the dollar to buy $1.1937.

Financials were among the worst performers on the FTSE 100. Fund manager Abrdn and insurer Prudential dropped more than 3.15 per cent.

Banks, despite the growing rate rise expectations, also suffered losses. Barclays and NatWest shed 1.92 per cent and 1.82 per cent respectively.

Lenders tend to benefit from higher interest rates as they allow them to charge more loans. However, they perform poorly during economic downturns as consumers and businesses rein in borrowing.