London’s FTSE 100 fell today driven lower by house builders tumbling on the prospect of higher interest rates.
The capital’s premier index lost 0.52 per cent to drop to below 7,000 points, while the domestically-focused mid-cap FTSE 250 index, which is more aligned with the health of the UK economy, tumbled 2.36 per cent to 17,304.11 points.
The City has stepped up its bets on the Bank of England raising rates steeply to tame inflation and project the pound.
Sterling tumbled to its lowest level against the US dollar at the beginning of this week, but has since recovered some ground. It fell yesterday.
Yields of UK government debt have also surged due to investors demanding a greater return to fund extra government borrowing and the country’s large trade deficit.
Yields on the 30-year gilt breached five per cent for the first time since 2002. Yields and prices move inversely.
Chancellor Kwasi Kwarteng’s mini-budget last week in which he cut taxes by £45bn has sparked a huge re-pricing of UK assets. Investors are also sobering up to the UK’s enormous trade deficit, which is hitting the pound the raising borrowing costs.
The moves prompted the Bank of England yesterday to move to steady traders by saying it will not hesitate to hike rates to get inflation back to its two per cent target.
Its chief economist, Huw Pill, said today the Bank will deliver a “significant” response at its meeting on 3 November to tame the market turmoil. That likely means a rate hike of as much as 100 basis points.
Expectations of higher borrowing costs feeding through to higher mortgage costs have prompted economists at Capital Economics to warn house prices may slide more than 20 per cent.
A cloudy housing market outlook weighed on property stocks, with property search site Rightmove falling 8.85 per cent and to the bottom of London’s FTSE 100.
House builders Barratt Developments and Taylor Wimpey shed more than six per cent.
Miners offset losses on the FTSE 100, with Antofagasta and Rio Tinto all near the top of the index.