Europe close: Stocks higher on flurry of rate decisions

(Sharecast News) - European shares closed higher on Thursday as investors digested a heavy slate of central bank decisions across the region.

The pan-European Stoxx 600 rose 0.96% to 585.35, with Germany's DAX up 1% at 24,199.50, France's CAC 40 gaining 0.8% to 8,150.64 and the UK's FTSE 100 advancing 0.65% to 9,837.77.

Markets reacted positively after the European Central Bank held interest rates steady, while the Bank of England delivered a long-flagged rate cut, and Sweden and Norway also kept policy unchanged.

Russ Mould, investment director at AJ Bell, said the FTSE 100 had been "steady in early trading as investors await a Bank of England meeting which is seen as being nailed on to deliver a pre-Christmas rate cut," adding that "continuing strength in the housebuilding sector and some signs of life among retail shares were notable features of early trading," even as "selling in Asian and US markets overnight" reflected lingering fears about a possible AI bubble.

Bank of England delivers rate cut, ECB stands pat

The ECB left its benchmark rate at 2%, marking a fourth consecutive hold, and reiterated that it was "determined to ensure that inflation stabilises at its 2% target in the medium term," stressing a data-dependent, meeting-by-meeting approach with no pre-commitment to a rate path.

It lifted its eurozone growth forecast to 1.4% for this year from 1.2% and to 1.2% in 2026 from 1%, while projecting headline inflation of 2.1% this year, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028, citing slower-than-expected easing in services inflation.

ING economist Carsten Brzeski said the extended pause "sends a strong signal" that a "severe downward shift in inflation and growth" would be needed to prompt cuts, adding that the ECB's current "good place" reflects a neutral stance and that the latest inflation projections support that position.

Mould noted that the ECB decision had been widely anticipated, with "no change anticipated," while investors were also looking ahead to US inflation data "for some clues about what direction the Federal Reserve might take next year."

In the UK, the Bank of England cut Bank Rate by 25 basis points to 3.75%, its lowest level since February 2023, in a narrow 5-4 vote following better-than-expected inflation data.

Governor Andrew Bailey backed the cut, while chief economist Huw Pill voted to hold rates at 4%.

The MPC said rates were likely to continue on a "gradual downward path" but warned that future decisions would be a "closer call."

CPI inflation fell more than expected in November to 3.2%, with food inflation easing to 4.2% from 4.9%, and the MPC now expected inflation to be close to target around the second quarter of 2026.

Bailey said the key issue was whether inflation would settle at 2% "in an enduring way," noting accumulating economic slack but still-elevated inflation expectations, while Pill argued that underlying inflationary pressures remained stronger than expected.

Neil Wilson of Saxo Markets said hawkish concerns over wage growth were "hard to reconcile" with falling inflation indicators and rising unemployment, while Emma Wall of Hargreaves Lansdown noted that the unexpectedly tight vote had made the future path for rates less certain.

Elsewhere, Norway's Norges Bank held its policy rate at 4%, saying the outlook was "uncertain" but signalling scope for cuts next year if the economy evolves as projected.

Governor Ida Wolden Bache said the bank was "not in a hurry" to ease, with mortgage rates seen just above 4.5% in 2028.

Sweden's Riksbank also left rates unchanged at 1.75%, saying the recovery was under way and inflation had approached target, but warned that geopolitical risks, US trade policy uncertainty, high asset valuations and weak public finances could affect the outlook.

Euro area construction output rises

On the economic front, eurozone construction output rose to a six-month high in October, with the construction production index up 0.9% month on month to 103.1 and 0.5% higher year on year, driven by gains in civil engineering and specialised construction.

The largest monthly increases were seen in Slovenia, Germany and Portugal, while Slovakia and France recorded declines.

In the UK, the BRC's consumer sentiment balance improved to -38% in December from -44%, though confidence remained weak.

BRC chief executive Helen Dickinson said the picture was still "gloomy," with spending expectations negative across most retail categories despite an uptick in food and grocery demand.

Global data also influenced sentiment after US inflation slowed more than expected in November, with headline CPI at 2.7% and core inflation at 2.6%, both below forecasts.

"Today's CPI print certainly delivered the goods for investors, but worries about the data will muddy the waters as we move into 2026," said Chris Beauchamp, chief market analyst at IG.

He added that while investors were "keen to see data that supports the argument that the Fed will keep cutting next year," there was still a risk that "uncertainty around price trends will lean against hopes of more cuts next year," even as stocks had "reacted enthusiastically" after their rally was "spoiled yesterday because of Oracle."

Initial jobless claims fell to 224,000, but manufacturing activity in the Philadelphia region weakened further, with the Fed's index dropping to -10.2 in December, underscoring ongoing softness in the sector.

Aeroports de Paris in the red, Whitbread jumps on London planning permission

In equities, Aeroports de Paris tumbled 12.27% after a Jefferies downgrade to hold, while Germany's Rational surged 5.16% following a UBS upgrade.

Whitbread jumped 5.98% after the Premier Inn owner secured planning permission for a new London hotel.

BP was in focus after naming Woodside's Meg O'Neill as its next chief executive, though the shares closed 0.12% lower on the day.

Russ Mould said the departure of Murray Auchincloss as BP chief executive "probably can't be chalked up as a major surprise, but the timing and suddenness of it can be," noting that Auchincloss had faced sustained pressure following activist investor Elliott taking a stake earlier this year.

He added that "the ultimate arbiter - the share price - doesn't speak in Auchincloss' favour," and said the reported backing of O'Neill's appointment by Elliott should give her "some breathing space" as she looks to implement her strategy.

Semiconductor names ASML Holding and ASM International rose 2.14% and 1.89% respectively, advancing despite renewed jitters around US data-centre investment.

Reporting by Josh White for Sharecast.com.