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European markets up as Bank of England raises interest rates

LONDON, ENGLAND - DECEMBER 27: Share price information is displayed on screens at the London Stock Exchange offices after reopening following the Christmas holiday on December 27, 2018 in London, England. The FTSE 100 hit a fresh two-year low today despite stock markets around the world recording significant gains by the end of Wednesday.  (Photo by Jack Taylor/Getty Images)
The uncertainty over the Omicron variant, and the economic impact of the pandemic, means Threadneedle Street may leave rates on hold. Photo: Jack Taylor/Getty Images

European stock markets pushed higher on Thursday as traders digested key decisions on interest rates from the Bank of England (BoE) and the European Central Bank (ECB).

In London, the FTSE 100 (^FTSE) jumped more than 1.3% on the day, despite a firmer pound, while the CAC (^FCHI) climbed 1.2% in Paris and the Frankfurt DAX (^GDAXI) was 1.1% higher.

It came as the BoE hiked UK interest rates from 0.1% to 0.25% for the first time since the start of the pandemic in a bid to combat soaring inflation.

The European Central Bank, meanwhile, voted to leave interest rates unchanged despite rising inflation across the eurozone.

The Monetary Policy Committee (MPC) voted 8-1 to take action amid pressure from the International Monetary Fund (IMF), who discouraged it from any further delays. It also voted 9-0 to maintain the amount of quantitative easing at £895bn ($1.2tn).

Read more: Bank of England raises interest rates to 0.25% amid soaring inflation

UK inflation hit a 10-year high of 5.1% last month, more than double the Bank’s 2% target, putting pressure on the Monetary Policy Committee (MPC) to lift borrowing costs from record lows.

The pound (GBPUSD=X) jumped by almost a cent against the US dollar on the back of the news, hitting $1.335, a rise of 0.7%. This is the currency's highest level in more than two weeks.

The pound soared 0.7% against the dollar on the back of the news. Chart: Yahoo Finance
The pound soared 0.7% against the dollar on the back of the news. Chart: Yahoo Finance

Bank stocks also surged higher on the day, with Barclays (BARC.L) up 3.8%, Lloyds (LLOY.L) climbing 4.6% higher, and HSBC (HSBA.L) gaining 4%.

Read more: European Central Bank leaves rates on hold despite rising inflation

Elsewhere, business groups are urging the UK government to provide more support for the hospitality sector to help them survive the impact of the new virus strain.

Last night, Chris Whitty, chief medical officer, said people should cut back on socialising in the run-up to Christmas to curb the spread of the virus.

Watch: Will interest rates stay low forever?

Across the pond, the S&P 500 (^GSPC) dipped 0.1% and the tech-heavy Nasdaq (^IXIC) fell 1.4%. The Dow Jones (^DJI) edged 0.4% higher by the time of the European close.

All three main indexes on Wall Street rallied on Wednesday after the Federal Reserve announced it was speeding up the taper of its pandemic financial support to $30bn a month, adding that it expects three interest rate rises next year, and three in 2023.

The move came after US inflation surged to 6.8% in November, the highest rate since 1982. However the tone of the statement, as well as the press conference suggested that they still believed that current levels of inflation were likely to be transitory.

Read more: Revealed: Best performing funds and trusts of 2021

“Despite liquidity being sucked out of the economy, stock traders are optimistic that the United States will be able to stay on track and achieve sustainable growth in 2022,” Naeem Aslam of Think Markets said.

“This is good news for stock markets because economic growth ultimately translates into higher profits for companies, which will mean higher returns for investors in the form of more dividends and rising share prices.”

Stocks in Asia took their cue from Wall Street overnight, with the Nikkei (^N225) climbing 2.1% in Tokyo as the dollar's rise against the yen helped exporters.

The Hang Seng (^HSI) rose almost 0.4% in Hong Kong, and the Shanghai Composite (000001.SS) gained 0.8%. Markets in Seoul, Taipei, Manila and Jakarta were also up on the day.

Watch: What is inflation and why it is important?