By Carla Mozee, MarketWatch

Bank of England holds key rate steady, but two policy makers sought a hike

U.K. stocks slumped toward their lowest point in more than a year Thursday, as blue-chips were clipped by a jump in the pound. The currency extended gains as the Bank of England signaled it is preparing to raise borrowing rates.

How markets are moving

The FTSE 100 index dropped 1% to 6,971.11, on course for its weakest finish since December 2016. Only the consumer goods sector was higher. On Wednesday, the benchmark fell 0.3% (http://www.marketwatch.com/story/ftse-100-loses-ground-as-retailers-drop-with-fed-decision-in-focus-2018-03-21).

The pound on Thursday hit an intraday high of $1.4217, but has since traded around $1.4160. That's still more than $1.4140 late Wednesday in New York. Also, sterling rose above EUR1.15 against the euro for the first time since June 2017.

Sterling has risen about 1.5% against the greenback so far this week, and by roughly 1.2% against the euro .

What's driving markets

London-listed blue-chip stocks continued to suffer after opening at their worst level in more than a year. Equities were knocked down largely on gains for the pound, as sterling traded around its highest against the dollar since early February, and at a nine-month high versus the euro.

A stronger pound can hurt stocks on the FTSE 100, as about 75% of revenue for its multinational components is made overseas.

Sterling hit its strongest intraday levels after the Bank of England, led by Gov. Mark Carney, signaled that it's looking at a potential interest-rate hike as U.K. wage growth improves. Investors had been pricing in a potential hike in May. The BOE for now held the key rate at 0.5%, but the vote was 7-2 as policy makers Ian McCafferty and Michael Saunders wanted a rate increase of 25 basis points.

Ahead of the BOE statement, data showed U.K. retail sales grew by 0.8% (http://www.marketwatch.com/story/uk-retail-sales-rebound-in-february-2018-03-22) on month in February, twice the pace seen in a Wall Street Journal survey of analysts.

The pound had been moving higher against the dollar since late Wednesday after the Fed signaled three interest rate increases in 2018, disappointing investors hoping for four hikes after upbeat inflation and labor data. The U.S. central bank did raise its benchmark fed funds rate as expected (http://www.marketwatch.com/story/fed-lifts-rates-in-powells-first-meeting-says-outlook-has-strengthened-2018-03-21).

The Fed's monetary policy tends to drive financial markets globally, as many companies do business in the word's largest economy and it can lift borrowing rates for them.

What strategists are saying

"Inflation seems to be falling back towards the target of 2%, as the effect of the weaker pound starts to filter out of the calculation. But a pick-up in wage growth points to an erosion of slack in the labor market. This raises the prospect that a wage-price spiral could push inflation back up in future. Throw in a hefty dose of Brexit-related uncertainty and it's easy to see why the committee is divided at present," said Ben Brettell, senior economist at Hargreves Lansdown, in a note.

"It now looks increasingly likely we'll see a rise to 0.75% at the Bank's May meeting. Beyond that the outlook is less clear. As ever, the bank is at pains to point out that the pace of interest rate rises will be gradual. Much will depend on how Brexit negotiations progress, but it's possible that further wage rises could force policy makers into a further rise this year," he added.

Stock movers

Reckitt Benckiser Group PLC (RB.LN) shares rallied 5.8% after the consumer goods company said it's ending talks about its potential purchase of Pfizer Inc.'s (http://www.marketwatch.com/story/reckitt-benckiser-ends-talks-to-buy-pfizer-unit-2018-03-22-44851030)(PFE) consumer health-care business. Reckitt Benckiser said it was looking to buy just part of the business, but that goal couldn't be met.

The move is seen as leaving GlaxoSmithKline PLC (GSK.LN) in prime position to buy the Pfizer assets. GSK shares were down 1.3%.

GKN PLC (GKN.LN) turned higher and were up 0.1%. The engineering group said it continues to view the GBP8.1 billion ($11.4 billion) hostile takeover offer from Melrose Industries PLC (MRO.LN) as entirely opportunistic (http://www.marketwatch.com/story/gkn-melrose-offer-still-wholly-inadequate-2018-03-22-44851155). Its statement came after Melrose announced it had come to an agreement with GKN's pension-scheme trustees.

Shares of Halma PLC (HLMA.LN) fell 3.1% after the safety, health and environmental tech group said foreign-exchange benefits have reversed and pretax profit for the full year will be in line with market forecasts (http://www.marketwatch.com/story/halma-sees-2018-profit-in-line-with-forecasts-2018-03-22).

Check out:Brexit hard-liners fling fish into Thames in bizarre protest (http://www.marketwatch.com/story/brexit-hard-liners-fling-fish-into-river-thames-in-bizarre-protest-2018-03-21)

 

(END) Dow Jones Newswires

March 22, 2018 09:03 ET (13:03 GMT)

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