By Sudip Kar-Gupta and Alistair Smout
LONDON (Reuters) - Britain's top shares index fell back from an 11-month high and underperformed other European indexes on Thursday after the Bank of England dashed hopes of an interest rate cut, hitting stocks sensitive to sterling strength and housebuilders.
The blue-chip FTSE 100 index closed down 0.2 percent at 6,654.47 points, having touched an 11-month peak of 6,743.42 before the Bank's decision.
The Bank unexpectedly held its benchmark interest rate steady, though most analysts had predicted a cut to a record low of 0.25 percent - which would have been the first reduction in more than seven years.
The Bank said it was likely to deliver stimulus in three weeks' time, possibly as a "package of measures" once it has assessed how the June 23 referendum decision to leave the European Union has affected the economy.
"We had a suspicion that they might keep rates on hold. With rates already so low, they only have a limited room for manoeuvre, and I sense that they’re conserving their ammunition in case they need to cut rates further down the line," said Kyri Kangellaris, director at Horizon Stockbroking.
The FTSE 100 was hit by a sharp rise in the pound as many of its companies earning revenues abroad and suffering from sterling strength. It lagged major European peers, which closed 0.9-1.6 percent higher.
The FTSE 250 mid-cap index, whose companies are more exposed to the domestic economy, cut gains to 0.2 percent.
Lower interest rates typically boost stock markets, as they dent returns on bonds and cash and can reduce borrowing costs for companies.
Housebuilding and property stocks, which had been among the hardest hit after the Brexit vote, turned lower, having rallied in anticipation of a rate cut. Lower rates often encourage consumers to take out loans to buy homes and property.
Berkeley Group was up 0.1 percent, having risen 2 percent before the decision, while Barratt Developments (LON:BDEV) was up 0.7 percent, having been as much as 3 percent higher before the decision.
"A cut is on the way, but not just yet. Clearly, the decision to keep rates on hold is having a bit of an impact on the housebuilding and property stocks that had been rallying earlier this week," Richard Griffiths, associate director at Berkely Futures, said.
Mining stocks rose on the back of firmer metals prices, with Anglo American (LON:AAL) up 3.8 percent as JP Morgan upgraded the company to "overweight". [MET/L]
"H1 results are likely to be a positive catalyst for Rio, Anglo and Glencore (LON:GLEN) in our view, and resilient prices have de-risked balance sheets, offering a platform for Anglo and Glencore to execute additional disposals," JP Morgan analysts said in a note.
The FTSE 100 is up nearly 7 percent so far in 2016, though a slump in sterling following the Brexit vote has meant the FTSE 100 remains below its pre-Brexit levels in U.S. dollar terms.