UK shares pare losses as BoE goes soft with rate hike

The central bank raised rates to 1.25%, the highest since January 2009, and stuck to its more gradual approach as it warned that Britain's economy would shrink in the April-June period. The 25-basis point raise came against the backdrop of heightened expectations of a bigger hike, especially after the U.S. Federal Reserve increased it by 75 bps, its biggest hike since 1994.

London stocks cut back some losses on Thursday after the Bank of England raised interest rates by an expected quarter percentage-points in its effort to combat inflation nearing double-digits. The central bank raised rates to 1.25%, the highest since January 2009, and stuck to its more gradual approach as it warned that Britain's economy would shrink in the April-June period.

The 25-basis point raise came against the backdrop of heightened expectations of a bigger hike, especially after the U.S. Federal Reserve increased it by 75 bps, its biggest hike since 1994. "The Bank of England is playing a game of slowly, slowly catchy inflation, rather than the shock-and-awe tactics being employed across the Atlantic," Laith Khalaf, head of investment analysis, at AJ Bell said.

"Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate-setting committee to observe more data as it comes in and finetune its approach as circumstances dictate." The FTSE 100 index was down 2.3% by 1212 GMT after falling as much as 2.8%, with a weaker pound also supporting the export-heavy index.

Rate-sensitive banks were down 2.7%, but off their lows hit after the rate decision. The domestically focussed mid-cap FTSE 250 index was down 2.8% after sliding as much as 3% earlier in the session.

Shares of oil major BP and Shell slid more than 4.5% to weigh the most on the FTSE 100 index. Homebuilder Persimmon and asset manager Intermediate Capital slumped 10% and 7.8%, respectively, to the bottom of the index as their shares traded ex-dividend.

ASOS Plc fell 30.3% and Boohoo 14.5%after the online fashion retailers warned of pain from rising product returns as consumers battle inflation and return to pre-pandemic behavior. The broader retailers index shed 4.7%.

Informa gained 1.6% after the events organizer more than doubled its share buyback program and forecast upbeat annual sales and profit outlook.