By Bansari Mayur Kamdar
(Reuters) -UK shares fell on Thursday, with the midcap index touching the lowest in over two months on recession fears after the Bank of England joined several global central banks in hiking interest rates to tame inflation.
The blue-chip FTSE 100 index closed down 1.1% at a three-week low, while FTSE 250 index, more exposed to the domestic economy, fell 2.1% to its lowest since July 5.
The Bank of England raised its key interest rate to 2.25% from 1.75% and said it would continue to "respond forcefully" to inflation as needed even though the economy risks being in a shallow recession already.
"The Bank of England delivered in line with expectations," said Sanjay Raja, senior UK economist at Deutsche Bank Research.
"The door is now open for a bigger hike in November, with the MPC explicitly acknowledging that should their updated outlook points to more persistent inflationary pressures, including from stronger demand, the Bank stands ready to respond forcefully."
The BoE estimates Britain's economy will shrink 0.1% in the third quarter - partly due to the extra public holiday for Queen Elizabeth's funeral - which, combined with a fall in output in the second quarter, meets the definition of a technical recession.
Investor confidence in British assets sits on the edge of a precipice ahead of new finance minister Kwasi Kwarteng's fiscal update on Friday, according to a Reuters poll earlier this week.
"The MPC expects the fiscal messages to be announced by the government tomorrow to be inflationary over the medium term and it is firing a warning shot that if too much is given away, rates will simply be raised higher," said Stuart Cole, head macro economist at Equiti Capital.
UK's rate-sensitive bank stocks slipped 1.5% as the prospect by higher rates was overshadowed by the economic gloom.
Capping some of the losses on the commodity-heavy FTSE 100, mining stocks such as Glencore, Rio Tinto and Anglo American rose between 0.8% and 2.3% as metal prices gained on a weaker dollar and optimism that stimulus measures would boost demand in top metals consumer China. [MET/L]
JD Sports fell 8.4% after UK's biggest sportswear retailer reported lower profit for the first half.
(Reporting by Bansari Mayur Kamdar and Sruthi Shankar in Bengaluru; editing by Uttaresh.V, Sriraj Kalluvila, Anil D'Silva and David Gregorio)