LONDON, Sept 22 (Reuters) - Sterling surrendered gains against the dollar and the euro on Thursday after the Bank of England raised its key interest rate to 2.25% and vowed to "respond forcefully, as necessary" to inflation, despite the economy entering recession.
The BoE raised its benchmark rate by 50 basis points (bps) as it takes aim at consumer inflation that is running near 40-year highs. Some market watchers had priced in the possibility of a 75 basis point increase.
The pound eased back from earlier highs after the BoE's decision, trading up 0.3% on the day against the dollar at$1.1300, having traded with a 0.85% gain right before the announcement.
Against the euro, sterling reversed earlier gains and fell 0.1% to 87.29 pence, after briefly rising to a one-week high of 86.95 pence before the decision.
London's blue-chip FTSE 100 share price index spiked briefly higher before reversing course and trading down 0.3% while the domestically-focused index of midcap stocks got a small boost but was still trading down 1.2%.
UK banks dropped after the news and were last down 0.1%. (Reporting by London Markets; writing by Joice Alves; edited by Amanda Cooper)