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UK stocks ‘Santa rally’ buried by Fed hike and Brexit uncertainty

The FTSE 100 sunk to its lowest level since August 2016 and Bank of England blames Brexit uncertainty for keeping interest rate rises on hold.

The FTSE 100 slumped to a 28-month low following the Federal Reserve raising rates for the fourth time this year, with investors growing skittish as US monetary policy tightens amid a global economic slowdown that buried 'Santa rally' witnessed earlier this month.

Unlike its US counterpart the Bank of England (BoE) opted to leave interest rates unchanged at 0.75%, with the central bank warning that Brexit uncertainty is having a real impact on the UK economy, hindering growth and eroding stock market gains.

Smooth Brexit essential for BoE rate rise in 2019

Despite the BoE eager to raise interest rates and bring inflation below 2%, the UK central bank opted for a pragmatic approach in light of recent global stock sell-offs in a bid to relieve pressure on equity markets that are nearing breaking point.

‘It is not surprising that the Bank of England’s monetary policy committee voted unanimously to keep the Bank rate at 0.75%,’ Senior economist at PwC Mike Jakeman said. ‘The Bank’s preferred direction for interest rates is upward, but there is little evidence that the economy could support a further rate hike at present.’

Jakeman argued that there is ‘growing evidence’ that the UK economy has weakened significantly since the summer, with consumer price inflation slowing amid a retail sector that is struggling in the run-up to Christmas rather than thriving.

"Ultimately though, it will be Brexit that determines the Bank’s next move - a fact acknowledged by the committee, which said its monetary policy response could be in 'either direction',’ Jakeman added.

‘On the assumption of a reasonably smooth Brexit, we would expect the Bank to raise interest rates once in 2019, likely later in the year.’

Worst hit UK stocks in pre-Christmas rout

Among the casualties on Thursday is UK cruise operator Carnival, which is down by more than 8% as of 4:34pm, with the company heading towards a two-year low despite a strong fourth quarter that exceeded analysts’ expectations.

British online supermarket Ocado also had a tough day’s trading, down nearly 3% to £7.55 levels as the London market nears its close. But overall, the supermarket has had a strong year, with it seeing some of the best returns from the UK stock market in 2018.

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