London markets register sobering day as Bank of England rate hike spooks investors

London markets dropped sharply yesterday after investors were spooked by the Bank of England hiking interest rates at successive meetings for the first time since 2004.

The capital’s premier FTSE 100 index closed 0.71 per cent lower at 7,528.84 points, while the domestically-focused FTSE 250, which is more aligned with the health of the UK economy, tumbled 1.27 per cent to 21,967.78 points.

The City’s top indexes started the day broadly flat, but dropped after the Bank announced it is lifting rates 25 basis points to 0.5 per cent.

Higher interest rates tend to hit stock markets as they reduce equity valuations and make the cost of borrowing money more expensive.

Banks, that benefit from a higher interest rate environment as it widens their net interest margin and allows them to charge more for loans, were muted on the news.

High street lender Lloyds was the best performer in the sector, adding just 0.83 per cent.

Oil mega cap Shell, which represents an enormous share of the FTSE 100 meaning movements in its share price exert a strong influence over the direction of the index, was the second best performer on the day, rising 1.43 per cent after it posted a surge in profits.

However, analysts said investors’ reaction was poor given the bumper crop of results.

Danni Hewson, financial analyst at AJ Bell, said: “Shell’s windfall has been met with a rather muted response considering the scale of the profits and the repurchase programme announced alongside the numbers.”

The pound strengthened 0.2 per cent against the dollar to buy $1.3604.