FTSE down despite UK rate cut

The FTSE lost ground on Thursday as the Bank of England delivered the expected cut in UK interest rates but cautioned on rising inflation.

The move by the bank's monetary policy committee to cut the official bank rate by a quarter of a percentage point to 5.25 per cent amid growing signs of a weakening UK economy had been widely expected and already priced into the market, strategist said.

But with a few dealers hoping for a cut of 50 basis points, leading shares came off as the bank warned of upside risk for inflation in coming months.

The bank said: "The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening.

"Consumer price inflation, at 2.1 per cent in December, was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

40 points lower prior to the announcement, the FTSE 100 was down 87.8 points, or 1.5 per cent, to 5,787.6 points just after mid-day.

Howard Archer, strategist at Global Insight, said: "Despite calls for a 50 basis point cut the bank was never really likely to cut by more than 25bp. While the bank clearly needed to take further action to try and limit the growing downside risks to the growth outlook, its scope to cut interest rates aggressively is limited by significant inflationary pressures."

Edward Menashy, chief economist at Charles Stanley, said: "Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation."

The rate cut came after a busy morning for corporate news.

Yell Group was the FTSE 100's biggest faller after the chief executive of the directories company said it was suffering as the UK economy weakened.

John Condron said the group was on track to meet full-year earnings targets but cut revenue forecasts because of "rising economic uncertainties". The shares fell 14.7 per cent to 281½p.

British Telecom fell 7.8 per cent to 242p after third-quarter core earnings rose in line with forecasts, but revenues at the telecoms group missed expectations as lower growth in premium rate services offset strong growth from broadband and IT services.

Rolls Royce dropped 8.6 per cent to 438½p as investors were left disappointed by the size of the aerospace engine group's share buybacks.

Announcing a 13 per cent rise in underlying full-year profit, Rolls Royce said it would continue to deliver profitable growth and positive cash flow in 2008 and increased its final dividend by 51 per cent to 8.96p a share.

BG Group rose 4.6 per cent to £11.27 after beating forecasts with a 25 per cent rise in fourth-quarter net profit. However, the company pared its medium-term growth targets and issued disappointing figures on reserves replacement, saying only half the oil and gas extracted last year was replaced by new reserves.

British Land fell 0.2 per cent to 960p after reporting a 17 per cent fall in the net asset value of its portfolio as commercial property valuations continued to drop. The market had expected a fall of 20 per cent.

Overnight in New York, the Nasdaq Composite index slipped into bear market territory. A fall of 1.3 per cent took its slide from its high in October to more than 20 per cent.

The Dow Jones Industrial Average closed down 0.5 per cent while the S&P 500 lost 0.8 per cent.