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Bansari Mayur Kamdar

(Reuters) – U.K. stocks fell on Thursday, with a mid-cap index hitting its lowest level in more than two months, as the Bank of England joined several global central banks to raise interest rates to curb inflation, sparking recession fears.

The blue-chip FTSE 100 closed 1.1% lower at a three-week low, while the FTSE 250, which was more affected by the domestic economy, fell 2.1% to its lowest since July 5.

The Bank of England raised its benchmark interest rate to 2.25% from 1.75% and said it would continue to “tackling” inflation as needed, even though the economy may already be in a mild recession.

“The Bank of England’s performance was in line with expectations,” said Sanjay Raja, senior UK economist at Deutsche Bank Research.

“The door is now open for a steeper rate hike in November, with the MPC clearly acknowledging that the central bank stands ready to respond forcefully if their updated outlook points to more persistent inflationary pressures, including from stronger demand. “

The Bank of England estimates the UK economy will shrink by 0.1% in the third quarter – in part due to an extended public holiday for Queen Elizabeth’s funeral – coupled with a fall in output in the second quarter, meeting the definition of a technical recession.

Investor confidence in British assets was on the brink of a cliff ahead of Friday’s fiscal update from new Finance Minister Kwasi Kwarteng, according to a Reuters poll earlier this week.

“The MPC, which expects the government’s fiscal announcement tomorrow to be inflationary in the medium term, is warning that if you give up too much, rates will only rise,” said Stuart Cole, head of macro. Equiti Capital economist.

U.K. interest-rate-sensitive banks fell 1.5 percent as the prospect of higher rates was overshadowed by a sluggish economy.

Mining stocks such as Glencore, Rio Tinto and Anglo American made up some of the losses in the commodity-heavy FTSE 100, rising between 0.8% and 2.3%, as metals prices fell on a weaker dollar and expectations for stimulus measures. Consumer China rose on optimism boosting demand for top metals. [MET/L]

Shares in JD Sports fell 8.4% after Britain’s largest sportswear retailer reported lower first-half profits.

(Reporting by Bansari Mayur Kamdar and Sruthi Shankar in Bengaluru; Editing by Uttaresh.V, Sriraj Kalluvila, Anil D’Silva and David Gregorio)