The FTSE 100 and Wall Street were in the red as the European Central Bank (ECB) confirmed its intention to hike interest rates at its policy meeting next month and downgraded its growth forecasts.
The ECB has said it expects to raise interest rates next month as it steps up its efforts to tackle surging inflation.
Across the pond, Wall Street slipped as investors digested the European Central Bank’s plan to begin increasing interest rates next month. The S&P 500 (^GSPC) fell 0.6% as the closing bell rang across Europe. The Dow Jones (^DJI) slipped 0.5% and the technology-focused Nasdaq (^IXIC) was down 06%.
The central bank left rates unchanged following its latest meeting. Its main refinancing rate stays at 0%, while its marginal lending facility and deposit facility rate stand at 0.25% and -0.5% respectively.
But the ECB said it expects to raise rates by 25 basis points at its July monetary policy meeting, and then again in September. That would be the ECB’s first rate rise since 2011, just before the eurozone debt crisis intensified.
Inflation is now expected to jump to 6.8% in 2022, up from previous forecasts of 5.1%.
The London benchmark slipped for a third straight session on fears about the impact of more interest rate hikes.
Sainsbury's (SBRY.L) was the biggest faller, losing 5.3% before recovering slightly. Other retailers were also in the red, with B&Q owner Kingfisher (KGF.L) losing 4.1% and JD Sports (JD.L) shedding 1.3%.
The European Central Bank has kept interest rates on hold, but set out plans for an increase at its July meeting.
It said: "The governing council undertook a careful review of the conditions which, according to its forward guidance, should be satisfied before it starts raising the key ECB interest rates. As a result of this assessment, the governing council concluded that those conditions have been satisfied.
"Accordingly, and in line with the governing council’s policy sequencing, the governing council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting."
It also decided to end net asset purchases under its asset purchase programme as of 1 July.
Shares have also been hit by fears of a global slowdown. The OECD on Wednesday followed the World Bank in cutting its growth forecasts, with the war in Ukraine the latest blow to the global economy.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "Warnings from the OECD that the world is paying a hefty price for Russia’s invasion of Ukraine are crystallising concerns that the months ahead are set to be very difficult to navigate for many companies and consumers."
Meanwhile, oil prices have continued to rise, with Brent crude (BZ=F) at almost $124 a barrel.
The latest rise in oil prices has added to inflation fears, with the RAC yesterday reporting the biggest daily jump in the price of petrol for 17 years in the UK.
“Overnight, New York decided that it was in fact worried about inflation, having dismissed it the day before. Tomorrow, perhaps, they won’t be once again. That saw equities retreat, US yields firm, with US 10-years back above 3.0% once again, while the US Dollar also booked some modest gains,” Jeffrey Halley, senior market analyst at OANDA, said.
Asian markets were treading water as chances of extended COVID restrictions returning remain a worry. The Shanghai Composite (000001.SS) retreated 0.7% while the Hang Seng (^HSI) lost 1%. Tokyo’s Nikkei 225 (^N225) closed flat.