FTSE 100 Live: Stocks to drop as interest rate hike fears hit City

The FTSE 100 witnessed a decline as investors reacted to mounting concerns over interest rate hikes on Wednesday, following a sharp drop in bond market yields. Two-year gilt yields surged over 4.5 percent, raising borrowing costs and raising doubts about the UK's economic stability. The Bank of England maintains an interest rate of 3.75 percent, but cautious remarks at recent Monetary Policy Committee meetings have raised expectations of further hikes due to the prolonged Iran conflict.

Analysts warn that the UK's vulnerability to inflation shocks is contributing to the higher gilt yields. Brent crude hovered around $95 per barrel on Thursday, as investors remained apprehensive about the ongoing Middle East tensions and limited progress in reopening the Strait of Hormuz. RBC Capital Markets analysts expressed doubts about whether the current interest rate pricing will materialize, though they acknowledge the potential for further weakness.

Forecasts are heavily dependent on the ongoing Middle East hostilities resolving. A hint from US Federal Reserve Chair Kevin Warsh that interest rate hikes might occur has led to a rapid sell-off in US Treasuries, pushing up global yields. Economists predict UK inflation to rise above three percent in the coming months before falling back to two percent.

However, the Bank's Monetary Policy Committee has warned it may raise interest rates in the event of a renewed conflict between Iran and the US. In the worst-case scenario, inflation could exceed four percent, double the central bank's target of two percent.