The FTSE 100 closed sharply lower on Thursday after both the Bank of England and the US Federal Reserve opted to hold interest rates steady.
London’s blue-chip index fell 108.91 points, or 1.0%, to close at 10,399.70, while the FTSE 250 ended down 34.01 points, or 0.2%, at 23,330.72.
The AIM All-Share also declined, falling 7.79 points, or 1.0%, to finish the session at 800.04.
The Federal Reserve left its federal funds rate target range unchanged at 3.50-3.75%, marking its fourth consecutive hold, but its accompanying projections rattled markets.
Fed officials removed their prior outlook for a rate cut this year, with nine of 18 committee members now projecting a rate hike and only one expecting a cut.
Russ Mould, investment director at AJ Bell, said: “That took the market by surprise and caused a wobble on Wall Street.”
Mould added that “financial markets like cuts, and looser monetary policy was on the cards at the start of 2026,” but investors now face a difficult recalibration of expectations under new Fed chair Kevin Warsh.
Warsh, who replaced Jerome Powell following his final FOMC meeting in April, repeatedly stressed that the committee “unambiguously and unanimously have decided we are going to deliver” on its 2% inflation target.
Bank of America described the meeting as “clearly hawkish,” while David Morrison, senior market analyst at Trade Nation, noted the CME’s FedWatch Tool now predicts an 85% probability of at least one 25 basis point hike before year-end, up from 60% before the Fed statement.
The Bank of England’s Monetary Policy Committee voted 7-2 to leave the bank rate at 3.75%, with chief economist Huw Pill again calling for a 25-basis-point hike, this time supported by Megan Greene.
Governor Andrew Bailey said he was “content” with holding rates at present, while acknowledging that risks to inflation and interest rates remain on the upside.
JP Morgan analyst Allan Monks said the overall message from the BoE was that “further evidence of disinflation has bought more time for the committee to wait and assess the risk of second-round effects and inflation persistence.”
RBC Capital Markets revised its outlook, no longer expecting a July rate hike from the BoE, while JP Morgan pushed its forecast for a rise back to November from July.
UK labour market data offered a mixed picture, with the unemployment rate coming in at 4.9% in April, marginally better than the 5.0% economists had forecast.
Wage growth accelerated to 4.4% in the three months to April, ahead of the 4.0% forecast, adding to concerns about persistent inflationary pressure in the domestic economy.
Sterling weakened on the day, trading at 1.3246 dollars on Thursday afternoon, down from 1.3393 dollars on Wednesday, as the dollar strengthened following the hawkish Fed signals.
Gold fell sharply to 4,230.61 dollars an ounce from 4,356.32 dollars on Wednesday, dragging mining stocks lower, with Hochschild Mining dropping 7.3% and Fresnillo and Endeavour Mining falling 5.8% and 5.7% respectively.
Tesco slipped 0.9% after reporting sales of £16.83 billion for the 13 weeks ended 20 May, with UK like-for-like growth of 1.8% falling short of the Visible Alpha consensus of 2.3%.
Oil prices tumbled following a US-Iran agreement under which Tehran agreed to dilute its enriched uranium stockpile in exchange for significant economic relief, with Brent crude for August delivery falling to 77.04 dollars a barrel from 80.11 dollars at Wednesday’s London close.
US President Donald Trump signed the memorandum of understanding during a dinner with French President Emmanuel Macron at the Palace of Versailles following the G7 summit.