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FTSE 100 closes higher, Sainsbury shines

A broker at IG Index looks at his screens in the City of London

By Johann M Cherian

(Reuters) - Britain's exporter-heavy FTSE 100 share index closed higher on Thursday as the pound extended falls after the Bank of England lifted interest rates but indicated rates would go up less in future than markets expect now.

The FTSE 100 closed a volatile session 0.6% higher after the BoE raised rates by 75 basis points, the most since 1989, but it also warned that Britain faced a long recession and told investors borrowing costs were likely to go up by less than they expect.

Interest rate futures now show the central bank's rate to peak at 4.7% in Sept 2023 versus 4.75% before the announcement.

The pound tumbled 1.9%, while midcap stocks shed 0.6%.

"I think the message we got from the Bank of England today was relatively clear in terms of the peak. It's going be lower than what the market was was pricing before this meeting," said Dean Turner, chief euro zone and UK economist at UBS Global Wealth Management.

The central bank also noted that Britain has already entered a recession that could potentially last two years - longer than during the 2008-09 financial crisis.

"I wouldn't be of the view that the recession would necessarily be prolonged or very deep. It's important to remember that the Bank of England forecasts and conditions are on assumptions that interest rates are going to be higher," added Turner.

Following the previous rate hike by the BoE, the UK government under then Prime Minister Liz Truss introduced an unpopular fiscal policy that threw markets into chaos forcing her to resign, eventually leading to Rishi Sunak being elected as prime minister.

This comes as global financial markets reel from the fourth straight 75-bps-hike by the Federal Reserve on Wednesday, with it also flagging the "ultimate level" of the benchmark policy rate would likely be higher than previously estimated.

Precious metal miners slumped 3.4% as gold prices fell against a strong dollar. Rate sensitive banks, however, gained 0.9%.

Among single stocks, Sainsbury rose 7.0% after Britain's second-biggest supermarket group retained its financial guidance for this year.

BT tumbled 8.9% after the broadband and mobile operator increased its savings target by 500 million pounds ($569 million) to help fund the rising cost of building its fibre network as it met forecasts in the first half.

(Reporting by Johann M Cherian, Shreyashi Sanyal and Sruthi Shankar in Bengaluru; Editing by Subhranshu Sahu, Savio D'Souza, Shailesh Kuber and Susan Fenton)