Interest rate shock puts City on a slide

The surprise 25 basis-points increase in British interest rates, after the two-day meeting of the Bank of England's monetary policy committee, gave a severe shock to London's equity market yesterday.

The committee pointed to world demand, increased consumption, a strong housing market and a tight labour market as the reasons for the rate rise, which wiped out the 25-basis point reduction in June.

The stock market's response to the increase was instant and a clear indication of how much of a surprise it was. Down around 28 points ahead of the announcement, the FTSE 100 index suddenly plummeted, registering a three-figure decline before stabilising.

At the close of the trading session, the FTSE 100 had recouped much of its mid-session weakness, closing a net 55.9 off at 6,253.6.

The rest of the FTSE indices could not resist the downside pressure caused by the interest rate story. The FTSE 250 finished 29.6 lower at 6,123.8. The FTSE SmallCap index closed 4.4 lower at 2,854.7. Turnover in equities was 1.03 billion shares.