London Market: Interest rate fears to depress UK stocks

UK STOCKS may fall this week, led by Lloyds TSB Group and other banks on concern the Bank of England's Monetary Policy Committee will not cut interest rates this week. But bonds are expected to change little: investors expect rates to fall in coming months even if there is a pause in March after five cuts in as many months.

The Monetary Policy Committee meets 2 and 3 March, with recent reports on jobs, faster inflation and a bigger-than-expected rise in retail sales casting doubt on whether the central bank will cut rates. "The MPC may wait a little bit longer before they cut rates again to see the impact of the last 0.5 point cut," said Graham Campbell at Edinburgh Fund Managers. "Growth was more robust than expected."

UK bonds fell on Friday as concern that US interest rates will rise upstaged expectations for lower rates in the UK. "The US has taken the lead the last couple of days," Wattret said. The benchmark 10-year bond yield rose 3 basis points to 4.51 percent.

Gilt yields have risen on the belief that investors have driven them lower than is warranted by the prospects for interest-rate cuts this week and later. "The gilt market was getting carried away with itself," said Geoffrey Dicks, a UK economist at Greenwich Natwest. "Whether it was flight to quality, or pricing in low inflation or bigger rate cuts, too much was priced in."

The FT-SE 100 index rose 2.4 per cent, to 6,175.10 last week. It closed at a record high of 6,307.6. Thursday after the dollar reached a 16-month high against the pound, boosting expectations for exporters.

Various firms due to report earnings could also trigger declines on speculation they willnot meet expectations - including Vickers and Billiton. Vickers said earlier this month it expects 1998 profits to be lower than in 1997 as declines in its weapons business offset higher profits in turbines and shipbuilding.

European defence and automobile stocks fell on Friday on concerns that price competition will slice profit margins. British Aerospace indicated that Airbus Industrie lost $200m (pounds ) in 1998 as it cut prices to compete with US rival Boeing.

"There is a risk that industrial companies will disappoint," Edinburgh's Campbell said. "There is oversupply; pricing has been going down, and they've all got a very high fixed cost base."

Billiton is also likely to report lower earnings as prices for aluminum, nickel and ferroalloys fell due to the global slowdown.

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