The Bank of England dashed market hopes of a further rate cut for at least another month today, sending the FTSE 100 off its 11-month highs.
Having rallied to a peak of 6,743.42 before the Bank of England's decision, the FTSE 100 crashed to earth, closing down 0.2 per cent at 6,654.47 points.
Most analysts thought the Bank would cut rates to a record low of 0.25 per cent, but it instead left its benchmark at 0.5 per cent for the 88th straight month. Most members of the Monetary Policy Committee said the could see a rate rise in August however.
The pound moved sharply higher hitting $1.3470 following the decision but falling back to $1.3345 by the London close, up 1.5 per cent on the day.
The jump in sterling meant the FTSE 100 – where a majority of companies make their money overseas – was sent suddenly south. Its European peers closed 0.9-1.6 per cent higher.
AJ Bell investment director Russ Mould said:
The FTSE 100 was caught on the hop after the Bank of England's Monetary Policy Committee unexpectedly voted by 8-1 against any change in interest rates from their historic low of 0.5 per cent or its £375bn Quantitative Easing programme.
The market quickly sold off, erasing a one per cent gain in the FTSE 100 in a matter of seconds, although the UK’s headline index stabilised as it looked ahead to the prospect of monetary easing at the next Bank of England meeting on 4 August.
The FTSE 250 mid-cap index – more focused on the domestic economy – cut gains to 0.2 per cent.
Housebuilders – which fare better when rates are lower – had made strong gains on the prospect of a further cut to rates, but quickly lost ground following the announcement.
Berkeley Group finished up 0.1 per cent, having added two per cent before the decision. Barratt Developments ended the day 0.7 per cent higher, having been as much as three per cent.
The days worst performers were retailer Marks and Spencer and fashion label Burberry. They both closed down 2.3 per cent.
Financials also did well as lower rates make it more difficult for them to make money. St James's Place climbed by 3.4 per cent, while Royal Bank of Scotland added 2.5 per cent.
Legal & General and Standard Life were up 2.2 and two per cent respectively.