The FTSE 250 recorded its worst daily performance since the UK voted to leave the European Union, after the Bank of England (BoE) highlighted a tougher UK economic outlook while its policymakers were divided over whether to raise rates this month.
The bank's decision to maintain rates at 0.25% was backed by five MPC members. However, three voted for a rate hike to combat rising inflation, which was two more than expected.
On the news, the domestically-focused FTSE 250 fell 2.1% to 19,554 points. According to the Financial Times, this is its worst one-day decline since July 2016 in the aftermath of the Brexit vote.
Meanwhile, the yield on benchmark 10-year gilts rose from 0.95% to 1.03%. Sterling also jumped to almost $1.28 as expectations increased for an interest rate rise, before falling back.
The decision by three members to vote for a rate rise can largely be attributed to stronger-than-expected inflation which accelerated to 2.9% in May, its highest since April 2012.
Rising inflation has already hit retail sales volumes, which fell 1.2% between April and May. This was worse than economists had expected.
In reaction to the decision to maintain rates at 0.25%, BoE governor Mark Carney, said: "All members agreed that any increases in bank rate would be expected to be at a gradual pace and to a limited extent.
"The committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target."
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