By Sara Sjolin, MarketWatch
LONDON (MarketWatch) -- U.K. stocks ended sharply lower on
Wednesday after the Bank of England's November inflation report
stoked fears the central bank could hike interest rates as soon as
2015 due to a more upbeat assessment of the country's labor
market.
The FTSE 100 index dropped 1.4% to end at 6,630.00, the biggest
one-day percentage drop since August.
The Bank of England said that the U.K. unemployment rate is more
likely than not to reach its 7% threshold by the first quarter of
2015, assuming constant interest rates. That would possibly bring
forward a hike in the BOE's key lending rate. Also, if market
expectations that interest rates will rise in mid-2015 are taken
into account, the threshold is more likely to be reached in the
third quarter of 2015, as such rises would dampen growth in 2014
and 2015.
The 7% threshold has become a key level for financial markets
ever since the BOE released its August inflation report. That's
when the bank laid out its forward-guidance framework and vowed to
keep interest rates at a record low of 0.5%, at least until the
joblessness rate falls to that level.
At the time, the central bank predicted unemployment would
remain above 7% until 2016, but after recent upbeat data, markets
have already started to price in a rate hike earlier than that. At
a news conference on Wednesday, however, BOE Governor Mark Carney
reiterated that reaching the threshold would not necessarily
trigger an immediate policy response.
"At a simple level the implication is that the [Monetary Policy
Committee] may consider raising rates at an earlier stage than it
did three months ago. But, and it is a huge but, we note that the
guidance says that the committee aims not to raise interest rates
until unemployment has fallen to 7%, which is different from an
intention to raise the bank rate when this level is reached," said
Philip Shaw, chief economist at Investec Securities, in a note.
"Our reading is that the broad aim of the BOE's guidance is to
avoid any perception that a tightening might be imminent, rather
than to provide month specific hints over when rates might rise. In
this context, whether a hike is two or three years away is very
much a side issue," he added.
The British pound (GBPUSD) traded at $1.6027, up from $1.5902 on
Tuesday.
The Office for National Statistics said the U.K. jobless rate
fell to 7.6% between July and September, down from 7.7% in August.
That reading further ignited speculation that the unemployment rate
would drop faster than the initial BOE forecast.
Banks were among major decliners in the FTSE 100 index, with
shares of Barclays PLC (BCS) 2.8% lower, Lloyds Banking Group PLC
(LYG) down 1.5%, and sector heavyweight HSBC Holdings PLC (HBC) off
1.9%.
Shares of J Sainsbury PLC climbed 3% after the supermarket chain
reported a 9% rise in first-half profit as it continued to grow its
market share.
Outside the main index, ICAP PLC rallied 4.1% after the company
reported a 6% rise in first-half operating profit.
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