BoE Lowers Rates, Stocks Fall

123jump.com Staff
07 Feb, 2008
New York City

The Bank of England lowered the rate by 0.25% to 5.25%, still the highest among group of seven wealthiest nation. Investors are now looking for the rates to be below 4.75% by the end of the year. The ECB also led its rates firm, but indicated a shift in stance and showed its willingness to lower rates. Stocks in UK fell sharply after a string of weak earnings, rate cut, and worries related to economic slowdown and rising inflation.

3:00PM New York, 8:00PM London- Bank of England reduces key rate by 0.25% to 5.25%. GlaxoSmithKline, Unilever, and Smith & Nephew earnings disappointed investors.[/R]

Stocks indexes in London finished sharply lower on negative earnings reports from Smith & Nephew, Unilever, and GlaxoSmithKline.

Market Sentiment

In London trading FTSE 100 stocks fell 2.58% or 151.3 to 5,724.10. Of the 102 FTSE 100 stocks 8 gained, 93 declined, and 1 was unchanged.

Stocks edged lower on the weakness in the U.S. January retail sales, interest rate cut, and weaker than expected earnings from several domestic companies.

In Paris CAC 40 Index decreased 92.63 or 1.92% to close at 4,723.80 and in Frankfurt DAX index lower 113.79 or 1.66% to close at 6,733.72. In Zurich trading SMI decreased 145.44 or 1.92% to close at 7,420.01.

The Bank of England Rate Cut

The Bank of England Monetary Policy Committee cut its benchmark interest rate by 0.25% to 5.25%, adding the prevalent market conditions are posing serious “downside risks to the outlook for inflation”.

The Bank of England lowered its rate by 0.25% to 5.25% after a decision by a nine-member governing body. The pound fell against the dollar and euro after the rate decision. Weak retail sales, falling housing prices, and consumer anxieties have all affected the economic outlook for UK. Interest rates in UK are still high among group of seven wealthiest nations and UK is likely to face weakening economy and rising inflation pressures in 2008.

According to the Bank, credit market conditions for households and businesses are tightening and consumer spending has slowed, while output growth is forecasted to further decline.

In the accompanying statement the BoE said, “CPI inflation, at 2.1% in December, was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months,”

The Monetary Policy Committee also said that the lower level of the sterling will increase imports prices while inflation expectations remain high. Pound fell after the rate decision against euro and dollar.

ECB Holds Rate

The European Central Bank today held its key rate at 4% citing high upside risks in consumer prices as rising oil prices are forcing companies to pass on the cost to consumers

The European Central Bank left its rate unchanged at 4% after unanimous decision by governing council of 21 members. The President Jean Claude Trichet signaled that he will consider lowering rates if the economy show any sign of weakness. Euro fell after the rate decision. Before the meeting the ECB had signaled that it is worried that wage rise may fuel the inflation and market had interpreted it as a possible rise in interest rates.

The president in the press conference said that the spillover from the current instability in the financial market into the real economy is not known but the short term inflationary pressure must be contained from spilling over into the medium term economic outlook. The price stability remains the focus of the governing council, reiterated Trichet.


Statistical Classification of Northern Rock

The Office of National Statistics said today in a report that Northern Rock will be classified as a public financial corporation from October 9 2007.

However, the bank noted that this action must not be mistaken for nationalization of the troubled lender.

ONS said in a statement on its web site, “National Accounts classification is determined by control of ‘general corporate policy’, which does not always coincide with ownership. The decision is based on a judgment that the public sector has the power to control Northern Rock plc’s general corporate policy. This is largely due to powers that the Bank of England has taken as part of its secured lending facility arrangements through covenants in the loan agreements.”

Gainers and Losers

BG Group Plc led advancers in FTSE 100 index shares with a rise of 3.81% followed by rises in Smith & Nephew of 3.60%, in Carphone Warehouse of 1.14%, in Tullow Oil of 0.95%, and in Antofagasta of 0.89%.

BG Group Plc rose after the company announced today fourth quarter net income jumped 25% to £486 million.

Yell Group led decliners of the 102 FTSE 100 stocks with a decline of 15.23% followed by losses in Rolls-Royce Group of 10.21%, in Alliance & Leicester of 9.95%, in BT Group Plc of 9.80%, and in GlaxoSmithKline of 7.63%.

Rolls-Royce Group Plc declined after full-year profit fell by 39%.

Earnings Update

GlaxoSmithKline reported today that fourth quarter net income fell 10% to £1.06 billion. Earnings per share declined to 19.4 pence compared to 20.8 pence a year earlier. During the quarter Avardia sales plunged 55% to £130 million.

Smith & Nephew reported fourth quarter net income fell 26% to $222 million and revenue rose 25% to $967 million after the company acquired a Swiss company Plus Orthopedics Holdings. The company publishes its results in U.S. dollars and trades on the New York and London stock exchanges.


Group revenues in the year increased 21% to $3,369 million with particularly strong growth in orthopedic reconstruction. Reconstruction revenues were $1.240 billion for the year, benefiting particularly from hip resurfacing in the US and a recovery in US knee revenues in the fourth quarter.

Reported trading profit for the year was up 24% to $706 million with a 21.0% trading margin, 50 basis points higher than 2006 on the benefits of restructuring.

Under the two year share buy-back program of up to $1.5 billion announced last year we had bought back a total of 52 million shares at a cost of $640 million at the end of the year.

Unilever reported fourth quarter ending on December 2007 net revenue from continuing operations increased 2% to 9.89 billion euros, operating profit increased 3% to 1.097 billion, and net income declined 13% to 782 million euros. Net profit from total operations declined 63% to 787 million euros. Earnings per share from continuing operations were 25 euro cents.

For the full-year sales from continuing operations increased 1% to 40.187 billion euros, operating profit decreased 3% to 5.24 billion euros, net income increased 10% to 4.056 billion euros, and net income from total operations fell 18% to 4.136 billion euros. Earnings per share in the year rose 12% to 1.32 euros.

Throughout the year, sales growth averaged between 5.5% and with 6.1% in the fourth quarter. There has been an increasing contribution from higher pricing, 1.8% for the year and rising to 3.0% in the fourth quarter, in response to sharply higher commodity costs. The steady sales rise Europe continued, with 2.8% growth in the year. The fourth quarter was particularly strong, at 5.5%, against a weak quarter a year ago.

Cash flow from operating activities, at €5.2 billion, was €0.4 billion lower than in 2006 due to higher cash costs of restructuring and increased contributions to pension funding.

Return on invested capital was 12.7% in 2007. This represented an improvement from 11.5% in 2006, adjusted for the profit on the disposal of frozen foods.