On Wall Street, stocks fell broadly a day after the Federal Reserve indicated that its fight against inflation is far from over. The Dow Jones (^DJI) was muted at 32,174. The S&P 500 (^GSPC) lost 0.4% to 3,743 points and the tech-heavy Nasdaq (^IXIC) fell 1% to 10,420.
The UK's blue-chip index recovered after investors digested the BoE's decision to raise interest rates by 0.75 basis points to a 33-year high of 3%.
Rolls-Royce (RR.L) also lagged behind despite announcing that it expects to meet forecasts for the full year thanks to a recovery in long-haul flying and a strong defence business.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: “Rolls Royce is doing all it can within its control. Costs are being managed by inflation-linked clauses in its customer contracts, debt’s being repaid, and crucial Engine Flying Hours are edging upwards. The trouble is, and which has been the case since the pandemic struck, the group’s grappling against a multitude of headwinds from external forces.
"Engine Flying Hours, which are used to calculate how often Rolls Royce’s engines are serviced, will never take off completely while restrictions remain in China. At the same time, while the debt pile is coming down, and is on a fixed interest rate, it is still suffocatingly large. The group’s carrying £4bn ($4.5bn) of drawn credit around, and that will limit growth for a while yet because lightening that load takes priority over anything more exciting."
The recent turmoil under the Truss government eroded the UK's reputation for financial stability, and this must be restored Alpesh Paleja, CBI lead economist, said.
"The Bank has deployed a bumper rate rise, underscoring the scale of the UK’s inflation challenge. A weakening economy and tighter fiscal policy is set against volatility in global energy prices, stubbornly high inflation expectations and persistent wage pressures.
“With monetary policy focused on tackling inflation, the government’s immediate priority should be to reinforce markets’ faith in the UK’s hard-won reputation for stability — but fiscal sustainability and growth shouldn’t be an either or choice.
“The Autumn Statement must learn the lessons of the 2010s: fiscal sustainability and lifting trend growth are both priorities. Alongside protecting the most vulnerable, the government should safeguard capital spending and investment allowances to enable private sector investment to drive future growth.”
The US Federal Reserve hiked interest rates on Wednesday. The 75bp rise was expected but US markets fell back sharply after Fed chair Jerome Powell signalled further hikes were on the way.
"We have a way to go" before rate hikes could be paused, he said.
"The historical record cautions strongly against prematurely loosening policy," Powell warned. "We will stay the course, until the job is done."
Investors now expect rates to top out at more than 5%, compared with 4% currently.
Michael Hewson, chief market analyst at CMC Markets, said: “While Powell acknowledged that a slowdown in the size of rate rises was likely, it didn’t alter the fact that rates would probably still need to go much higher in order to get inflation back to target of 2% over time.”
Victoria Scholar, head of investment at Interactive Investor, said: "The Fed’s latest interest rate hike has sent global markets lower with the Nasdaq closing down more than 3% after the central bank suggested that it is prepared to go further to tackle inflation.
"Fed Chair Jay Powell warned that US rates will peak above expectations, dashing hopes that the rate hiking cycle was beginning to wind down and that inflation was under control in the eyes of the Fed."
Meanwhile, Brent crude (BZ=F) retreated to $95 per barrel, slipping 0.7%.