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European markets slide as central banks raise interest rates to curb inflation

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European equities traded lower on Thursday after three of the region’s central banks raised interest rates, ramping up their efforts to tackle stubborn inflation.

Europe’s region-wide Stoxx 600 fell 1 per cent and France’s Cac 40 lost 1.3 per cent. London’s FTSE was 1.1 per cent lower.

Stocks fell after the Bank of England stepped up the pace of its tightening campaign, lifting the bank rate by a more than expected 0.5 percentage points to 5 per cent on Thursday.

Earlier in the day, the Swiss National Bank raised its main policy rate 0.25 percentage points to 1.75 per cent and did not rule out additional increases to stabilise prices over the medium term. Norway’s central bank raised its key rate from 3.25 to 3.75 per cent and said it could raise rates again in August.

Ahead of the BoE announcement, a slim majority of investors expected a quarter-point rate rise, although the odds of a half-point increase mounted following disappointing inflation data earlier in the week.

“The BoE is [ . . . ] aware that if it doesn’t address elevated inflation now, it could become entrenched in the economy and more difficult to tackle later. So, the [central bank] will probably err on the side of caution and keep interest rates higher for longer,” said Daniel Casali, chief investment strategist at Evelyn Partners.

Yields on two-year gilts, which are sensitive to interest rate changes, fluctuated after the decision before rising 0.04 percentage points to 5.08 per cent. The yield on the benchmark 10-year lost 0.03 percentage points to 4.38 per cent. Bond yields rise as prices fall. 

Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 both lost 0.3 per cent ahead of the New York open. 

Both indices closed lower in the previous session, led by a decline in tech stocks, after the US Federal Reserve chair Jay Powell warned that interest rates would need to rise further to bring inflation back to the bank’s 2 per cent target.

Elsewhere, Turkey’s central bank lifted its benchmark one-week repo rate to 15 per cent from 8.5 per cent, in a sharp turnround from the low-rate policies pursued by President Recep Tayyip Erdoğan.

Trading was muted in Asia as stock exchanges in China and Hong Kong are closed on Thursday and Friday for the Dragon Boat Festival.

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