LONDON: Britain's top share index dropped to a four-month low on Thursday as sterling surged after the Bank of England signalled that it was likely to raise rates in the coming months, weighing on the FTSE 100's predominantly dollar-earning constituents.
The FTSE 100 ended the session 1.1 percent lower at 7,295.39 points, underperforming the broader European market which closed in positive territory.
The Bank of England's policymakers voted to keep rates on hold at a record-low 0.25 percent, and said that the central bank was likely to raise interest rates in the coming months if the economy and price pressures keep growing.
Sterling jumped more than 1 percent, putting pressure on big, international firms such as British American Tobacco and Diageo which source a large part of their revenues from overseas.
The drop in the pound after Britain voted to leave the European Union last June boosted the FTSE 100, as its dollar-earning constituents received an accounting boost when converting their revenues back to pounds.
Some investors, however, were more cautious on the outlook for rate hikes.
"Given downside risks to global and UK growth as well as to inflation as the impact of sterling depreciation fades over the next few months, I think this hawkish shift will not last," Anna Stupnytska, global economist at Fidelity International, said.
Financials also fell, with HSBC and Barclays dropping 1.5 percent and 0.9 percent respectively, while mining stocks saw some sizeable declines as the price of copper slid on the back of disappointing data from China.
Shares in Rio Tinto, BHP Billiton, Glencore and Anglo American were all down between 2.4 percent to 3.4 percent.
Morrisons, Britain's No. 4 supermarket, fell about 5 percent after publishing first-half results.
British fashion chain Next, however, was a bright spot with a 13 percent surge in its shares after it lifted its guidance, saying that it had managed to cushion the inflationary impact of a weak pound.
"Next remains a well-invested business that in our view has the operational and cost flexibility to deal with structural pressures posed by online, supported by strong and consistent cash generation," analysts at Investec said in a note, reiterating their "buy" rating on the stock.
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