FTSE 100 closes lower as U.S. stocks plunge

London shares reversed earlier gains on Thursday, as Wall Street plunged amid worries surrounding artificial intelligence and data-center stocks.

The FTSE 100’s rise earlier in the session came from a rally in domestic banking giants, and an earnings surge helped the market absorb the Bank of England’s first interest-rate increase in more than three years and warnings of further tightening ahead.

The benchmark index was largely unchanged following the announcement. However, it closed the session down 0.3% with U.S. indices setting a negative tone.

BoE hikes for first time in three years

The market’s composure was tested by the Bank of England’s decision to raise borrowing costs by 25 basis points to 4%, marking the central bank’s first interest-rate hike in over three years and ending a prolonged hold as it joined peers in Washington and Frankfurt in active tightening.

Threadneedle Street accompanied the move cautioning that at least one more rate increase remains likely if the protracted conflict between the United States and Iran continues to destabilize shipping corridors.

The central bank projected that British headline inflation is poised to accelerate to around 5% by the middle of next year - more than double its 2% statutory target.

Defending the rate increase, the Monetary Policy Committee noted that while there has been little evidence so far of rapid inflation contagion outside sectors directly affected by soaring energy tariffs, the sheer volume of pipeline pricing pressures accumulated from months of elevated fuel costs made an immediate preventive rate hike necessary to avoid unanchoring expectations.

Financial stocks anchored the morning advance, with UK banking majors rallying between 1.5% and 2.5% as fixed-income and equity desks prepared for the Bank of England’s Monetary Policy Committee announcement later in the session.

Barclays, Standard Chartered, Lloyds Banking Group, and HSBC Holdings all pushed firmly higher.

“This hike is not driven by domestic demand, but as a response to the resurgence of energy-driven inflation," said Nick Saunders, CEO of online investment platform Webull UK. 

"The Bank is tightening to prevent this external energy shock bleeding into wage demands and broader inflation rather than to cool the economy."

Meanwhile, shares of Diageo rose 3.2% after the world’s largest spirits maker reported first-quarter revenue that comfortably beat analyst expectations.

Beyond single-stock drivers, the FTSE 100 drew an earlier powerful baseline support from an unprecedented retreat across global commodity bourses. Oil also reversed course.

Brent crude futures is now up 2.1% on Thursday.

The earlier decompression of energy prices followed a decisive Democratic sweep in U.S. midterm elections, which dampened fears of unilateral U.S. military escalations against Iran and raised expectations of renewed diplomatic solutions to reopen tanker transit through the Strait of Hormuz.

For the UK economy, cheaper fuel prices provide an immediate deflationary dividend, relieving operational friction across domestic airlines, manufacturers, and transport groups.

Energy majors, such as Shell and BP, closed 0.3% and 0.7% lower on Thursday.