Volkswacht Bodensee - European stock markets retreat as central banks hike rates

The Bank of England was set to follow the Swiss and Norwegian central banks in raising borrowing costs in a decision due at 1100 GMT.

"For markets the cure of higher interest rates could be worse than the disease of high inflation amid speculation a 50-basis point rise could be in the offing" from the BoE, noted AJ Bell head of financial analysis Danni Hewson.

"Hawkish rhetoric from the US Federal Reserve is also doing little for sentiment."

Federal Reserve boss Jerome Powell dealt a blow to investors hoping its tightening cycle may be near an end by warning US lawmakers Wednesday it "may make sense" to keep lifting, worsening a cost-of-living crisis.

The European Central Bank last week joined Canada and Australia in hiking further.

Turkey was also tipped to reverse course from years of unconventional economics promoted by President Recep Tayyip Erdogan and dramatically raise interest rates to fight soaring inflation and steady the troubled lira.

After holding rates last week for the first time since starting last March, speculation had been growing that the Fed was close to calling it a day altogether, thanks to slowing price rises and a softer jobs market.

However, in congressional testimony on Wednesday, Powell said: "Given how far we've come, it may make sense to move rates higher but to do so at a more moderate pace."

He added that while progress was being made -- inflation dropped to 4.0 percent last month from 4.9 percent in April -- it "has consistently surprised us -- and essentially all other forecasters -- by being more persistent than expected".

Two more rate hikes this year was "a pretty good guess", he said.

The Fed has already raised its benchmark lending rate by five percentage points since March 2022, from close to zero to 5.0-5.25 percent.

Traders say there is a 75 percent probability officials will hike by 25 basis points at their July meeting, according to data from CME Group.

The expected increase in rates has revived worries the economy will tip into recession.

"The Fed is clearly not nearing the end of its tightening cycle and if other central banks seem poised to deliver more than a couple rate hikes, that might make it easier for the Fed to remain aggressive with tightening," said OANDA's Edward Moya.

"Powell said lowering inflation has a long way to go and that could very well mean that they won't stop until the fall."

All three main indices on Wall Street fell for a third-straight session, and Asia followed on Thursday.

Markets across Asia have gone into reverse this week, having enjoyed a healthy run-up in previous weeks on hopes that the tightening cycle was nearing an end and on talk that China was preparing a raft of stimulus measures.

The optimism was fanned by the Chinese central bank's decision to cut borrowing costs last week, though a smaller-than-expected reduction in the main benchmark rate this week knocked confidence.

The failure of Beijing to unveil any concrete policies to kickstart the stuttering economy has fed fears that the recovery from a Covid lockdown-induced slowdown has already come to an end.

Analysts said the traders are now looking ahead to a key meeting next month that will be headed by President Xi Jinping.

- Key figures around 0930 GMT -

London - FTSE 100: DOWN 0.8 percent at 7,496.21 points

Frankfurt - DAX: DOWN 0.6 percent at 15,924.24

Paris - CAC 40: DOWN 1.3 percent at 7,169.59

EURO STOXX 50: DOWN 1.0 percent at 4,278.47

Tokyo - Nikkei 225: DOWN 0.9 percent at 33,264.88 (close)

Hong Kong - Hang Seng Index: Closed for holiday

Shanghai - Composite: Closed for holiday

New York - Dow: DOWN 0.3 percent at 33,951.52 (close)

Euro/dollar: UP at $1.1001 from $1.0990 on Wednesday

Pound/dollar: UP at $1.2781 from $1.2766

Dollar/yen: UP at 141.89 from 141.87 yen

Euro/pound: UNCHANGED at 86.07 pence

West Texas Intermediate: DOWN 1.3 percent at $71.62 per barrel

Brent North Sea crude: DOWN 1.3 percent at $76.11 per barrel

M.Ouellet--BTB