Europe close: Stocks slip on hawkish Fed pause

European stocks finished significantly lower even after the Bank of England held rates steady for the first time in almost two years in response to lower-than-expected inflation figures on Wednesday.

Yet markets were still worried about hawkish comments overnight from the US Federal Reserve on future rate rises.

"'Higher for longer’ is the theme from all central banks at the moment, but it is the Fed that has really spelled doom for risk appetite," said IG chief market analyst Chris Beauchamp.

"No one really expected the pause to be accompanied by such a dramatic shift in the dot plots, but perhaps this time the market will really believe that the Fed is determined to leave rates at their current elevated levels until inflation is well and truly slain."

The pan-European Stoxx 600 index was down 1.3% to 454.67, alongside a 1.33% drop for the German Dax to 15,571.86, while Italy's FTSE Mib gave back 1.78% to 28,708.55.

Britain's FTSE 100 rallied briefly after the announcement to pause a long run of rate hikes, but slipped back into the red as traders digested a downbeat assessment of UK growth prospects from the bank's policy committee, which had been split 5-4 on whether to raise rates.

Officials now expect GDP to rise only slightly in the third quarter of the year and forecast that underlying growth in the second half is also likely to be weaker than expected.

Fed decided to keep interest rates unchanged from the 5.25-5.5% range, as was widely expected by the market. This was the second time this year where its rate-hiking cycle has been paused.

However, top Fed officials said they expected to raise rates once more this year, at one of the two remaining meetings in November or December. Furthermore, looking further forward, the committee indicated that interest rates would only be lowered to around 5% by the end of 2024, indicating that they remain committed to a "higher-for-longer" strategy.

At a press conference following the meeting, chair Jerome Powell said he still needed to see "convincing evidence" that higher interest rates are having the desired effect on inflation before the FOMC can begin to loosen monetary policy.

In equity news, shares in JD Sports Fashion jumped 9% as the sports leisurewear retailer posted a rise in interim profits and said it expected annual earnings to rise 5% on strong sales.

UK fashion retailer Next also gained after lifting guidance for the third time in four months after strong summer sales boosted half-yearly profits.

Shares in Ocado fell almost 20% after Exane downgraded the UK online supermarket to 'underperform' following its recent rally, citing concerns over subdued growth in its retail business.