Stocks, sterling slide as central banks wage war on inflation with rate hikes

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By Lawrence Delevingne and Amanda Cooper

(Reuters) -Shares fell globally on Thursday after major central banks delivered their final policy decisions of the year, with the U.S. Federal Reserve signalling it expected interest rates to stay higher for longer.

In Europe, the Bank of England (BoE) delivered its ninth straight rate rise - and the eighth of 2022 - saying it believes more increases will be necessary, even though it thinks UK inflation has peaked.

The European Central Bank (ECB) also raised interest rates by half a percentage point, its fourth successive hike, and outlined plans to shrink its bloated balance sheet from March, hoping that higher borrowing costs will finally arrest runaway inflation.

The pound initially slid by more than 1% against the dollar after the BoE's Monetary Policy Committee voted 6-3 in favour of the half-point rise to 3.50%, highlighting the split among policymakers over how to tackle double-digit inflation, wage growth and a slowing economy. It was last down about 1.1% for the day following the ECB rate hike.

"The extent of the divisions across the committee is an eye-opener," said Philip Shaw, chief economist at Investec.

"While it is normal to see policymakers disagree towards the end of a rate cycle, the split makes it more difficult to predict the extent to which interest rates will rise," Shaw said.

Earlier in the day, the Swiss National Bank delivered an expected half-point hike that brought rates to a 14-year high of 1%, while the Norwegian central bank raised rates by a quarter-point to 2.75% and indicated it had not finished tightening monetary policy.

The MSCI All-World index was last down 0.6%, set for a second straight day of declines, after losses on Wall Street the previous day drove the S&P 500 down 0.6%.

Global stocks have risen by nearly 13% this quarter, marking their strongest quarterly performance for two years, based on the assumption that U.S. inflation is subsiding and soon the Fed will indicate it no longer needs to rapidly raise rates.

"Each time we get cooling inflation data and then the market gets really ahead of itself thinking 'this is going to be the moment that the Fed is going to go dovish' and then they're disappointed," CityIndex strategist Fiona Cincotta said.

"It seems to be a recurring pattern and I would imagine one that's going to continue as we go through Q1 of 2023 as well, so it's a combination of a market getting ahead of itself and some profit taking, but I don't think it's necessarily the start of an ominous downward trend," she said.

Fed Chair Jerome Powell said on Wednesday the central bank would deliver more rate hikes next year even as the economy slips towards a recession, arguing that a higher cost would be paid if the Fed does not get a firmer grip on inflation.

The comments followed the Fed's decision to raise the benchmark rate by half a percentage point - as expected, but down from the recent 75 basis point increases - but also projected a terminal rate above 5%, a level not seen since 2007.

The dollar, which has lost almost 7% in value in the fourth quarter, gained on the hawkish Fed view, up about 0.6% on Thursday, steering clear of this week's six-month lows.

U.S. Treasury yields were flat following the ECB hikes and before the U.S. market open.

In Europe, equities tumbled and bond yields rose. The STOXX fell by 1% as heavyweight stocks across sectors sank.

U.S. e-Mini futures slid between 1-1.2%, suggesting a drop at the opening bell.

The euro fell 0.4% to $1.064, but was still near Wednesday's more than six-month peak at $1.0695.

Sterling was last down 1% at $1.2303, still close to six-month highs.

Crude oil gave back some of Wednesday's 2.5% rally that was driven by forecasts of a rebound in energy demand next year on the back of China reopening after COVID lockdowns.

China's economy, however, lost more steam in November as factory output slowed and retail sales fell again, hobbled by surging COVID-19 infections and widespread curbs on movement.

U.S. crude fell 0.73% to $74.66 per barrel and Brent was at $77.42, down 0.46% on the day.

Gold prices retreated as the dollar strengthened. Spot gold dropped 1.1% to $1,807.96 an ounce, its lowest level in a week.