Europe midday: Shares pare losses as BoE holds rate steady

European stocks pared losses but were still significantly lower 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, although markets were still worried about hawkish comments from the US Federal Reserve on future rate rises.

The pan-European Stoxx 600 index was down 1.08% after a slump of 1.8% just before the BoE decision. 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.

"I don’t know if we categorise this as a hawkish hold – what's appears clear is that the BoE saw the CPI print coupled with soft growth figures and thought it’s enough to warrant holding fire for the time being," said Neil Wilson at Markets.com.

"If they really think that the disinflation seen in the Aug CPI is enough to declare victory then they are wrong. CPI inflation fell from 7.9% in June to 6.7% in August, which is ‘good news’ but the core stickiness is not really budging fast enough."

"As per the Fed and European Central Bank, it’s very much less of a case of how high and as how long – the decision to pause today confirms that the BoE is falling in line with peers – the emphasis now is on duration not the absolute level."

US and Asian markets were also down overnight after the 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, 12 of the 19 voting FOMC members said they expect 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.

The comments, which dragged US stock markets into the red, will likely have worried UK investors ahead of the BoE's own Monetary Policy Committee meeting, given recent optimism that today's expected interest-rate hike – by 25 basis points to 5.5% – will be the last in the central bank's current cycle.

‘’Nervousness is pervading sentiment as investors assess the prospects of interest rates staying higher for longer. The mood is being driven by the US Federal Reserve taking a defensive stance in the fight against inflation, pausing for now but signalling a fresh rate hike to come," said Hargreaves Lansdown analyst Susannah Streeter.

"While Fed officials are keeping the boxing gloves on ready to spring into action again, there is increased speculation the Bank of England may call time on hikes although it is still expected to keep interest rates at elevated levels until later next year."

In equity news, shares in JD Sports Fashion jumped 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 10% at one point after Exane downgraded the UK online supermarket to 'underperform' following its recent rally, citing concerns over subdued growth in its retail business.

Reporting by Frank Prenesti for Sharecast.com