Higher Inflation Drag Stocks

123jump.com Staff
14 May, 2008
New York City

The Bank of England inflation report suggested that pressures on inflation are rising as credit market remains tight. Separately the governor of BOE said that inflation may rise above 3% for several quarters. Shareholders of Royal Bank of Scotland approved

[R]1:00PM New York, 5:00PM London – The Bank of England projected inflation to rise above 3%.[/R]

Stocks in London rose marginally after an advance in commodity stocks managed to offset losses on negative inflation projections by the Bank of England.

In London trading FTSE 100 rose 0.07% or 4.1 at 6,216.00. Of the 102 FTSE 100 stocks 42 gained, 55 declined, and 5 were unchanged. Eurasian Natural led advancers in the index shares with a rise of 7.19% followed by BHP Billiton rising 4.85% as investors bought energy stocks.

The Bank of England issues gloomy inflation forecast

The Bank of England reported in its May inflation report that the outlook for inflation continues to be shaped by two opposing forces, as sharp increases in energy and import prices are set to push inflation higher in the near term, posing risks to the medium-term outlook if inflation expectations remain elevated.

According to the bank, a pronounced tightening in the supply of credit, coupled with the pressure of higher energy and import prices on real incomes, is expected to slow activity this year, pulling down on future inflation. The report estimated that both forces have intensified since the February.

“The key challenge for the Monetary Policy Committee is to judge where the balance of these risks lies in the medium term,” said the bank in the report.

Separately, the Governor Mervyn King told reporters in London today that U.K’s inflation will breach the 3% target for several quarters, adding that monetary policy “must focus on bringing inflation back to the target in the medium term.''''

Royal Bank of Scotland gets approval to raise £12 billion

The Royal Bank of Scotland shareholders voted 95% in favor of a plan to issue 6 billion new shares in a rights offer and won 96% approval to distribute 1 billion new shares to pay the first-half dividend rather than stock.

The bank is looking at raising £12 billion to recapitalize and lift Tier 1 capital ratio, a measure of capital strength, to more than 8% from 7.3% by the end of the year after writing down £5.9 billion of assets this year, a third of which resulted from the acquisition of ABN Amro Holding NV.

Gainers & Losers

Eurasian Natural led advancers in the FTSE 100 index shares with a rise of 7.19% followed by increases in BHP Billiton Plc of 4.85%, in Compass Group of 4.60%, in London Stock Exchange of 4.55%, and Vedanta Resources of 4.50%.

Other commodity stocks rose as well. Kazakhmys Plc rose 4.27%, Rio Tinto gained 3.55% and Antofagasta increased 2.11%.

First Group led decliners in the FTSE 100 index shares with a drop of 6.26% followed by losses in Royal Bank of Scotland of 5.48%, in Persimmon of 5.17%, in British Airways of 4.60%, and Sainsbury of 3.91%.

Financial stocks also fell on the deteriorating conditions in the financial markets. Alliance & Leicester fell 2.83%, Barclays Plc shed 2.40% and Standard Chartered plunged 2.16%.