FTSE losses deepen after 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."

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."

Down 40 points prior to the rate announcement, the FTSE 100 extended its losses as a raft of weak earnings news added to the rate disappointment. By late afternoon, the senior London index was down 96.1 points, or 1.4 per cent, to 5,777.9, although off its lows for the session.

GlaxoSmithKline fell 7.3 per cent to £10.82 after forecasting lower earnings this year due to competition from manufacturers of generic treatments and falling sales of blockbusters such as diabetes drug Avandia. Concerns over generic competition prompted Dresdner Kleinwort to lower its target price on AstraZeneca from £20.98 to £18.40.

Analyst Tim Franklin said: "Generic launches against Nexium and Seroquel would negatively impact our 2008 base forecast by 11 per cent and EBIT and EPS by 30 per cent."

AstraZeneca shares fell 3.6 per cent to £19.55.

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 16.1 per cent to 277¼p.

British Telecom fell 8.5 per cent to 240½p 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 9.3 per cent to 435¼p 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.