London Stocks Down 6%, BoE Rate Cut

123jump.com Staff
06 Nov, 2008
New York City

The Bank of England sharply lowered its key lending rate by 1.5% to 3%. The larger than anticipated rate cut was overshadowed by fall in metals and energy prices. The negative sentiment dragged stocks in UK lower by 6% and in Europe more than 5%.

[R]1:00PM New York, 6:00PM London – The Bank of England unexpectedly lowers key rate to 3%. Home prices in October dropped. Stocks declined nearly 6%.[/R]

London stock indexes traded in negative territory after house prices dropped 13.7% from a year ago in October.

Commodity stocks also plummeted as metal and oil prices declined on the worries that demand will slow as the global economy slips into a recession.

In London trading FTSE 100 plunged 5.7% or 258.32 to 4,272.41.

Of the FTSE 100 index stocks, 6 rose and 96 declined. Marks & Spencer led gainers in the index shares with a rise of 3.3%.

Bank of England Cuts Key Rate to 3%

The Bank of England’s monetary policy committee elected to lower the base rate by 1.5 percentage points to 3%.

The central bank noted that the outlook for economic activity at home and abroad has deteriorated markedly.

Though interventions on bank capital, funding and liquidity have “begun to ease the situation” availability of credit to households and business is forecasted to remain crimped.

The BoE said there will be continued severe contraction of the economy in the near term as consumer spending has dropped on tight credit conditions and household budgets.

Monetary authorities say the outlook on inflation has fallen sharply to the downside.

“The Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target.

At its November meeting, the Committee therefore judged that a significant reduction in Bank Rate was necessary now in order to meet the 2% target for CPI inflation in the medium term, and accordingly lowered Bank Rate by 1.5 percentage points to 3%,” said the bank in a statement.

U.K. House Prices Fall 13.7% in October.

HBOS Plc reported today that house prices fell 2.2% from a month ago and 13.7% from a year ago to £168,176 in October.

Average house prices are however 22% higher than in October 2003.

The number of mortgages that were approved to finance home purchase remained unchanged for the third straight day to 33,000 in September from 32,000 a month earlier.

Mortgage approvals for the third quarter declined 25% from the previous quarter.

HBOS said soaring fuel and food prices that have increased 40% and 11% correspondingly for the year has cut the discretionary income to householders.

House price to average earnings ratio, which gauges housing affordability, has declined by 16% from a high of 5.84 in July 2007 to 4.92 in August 2008.

Gainers & Losers

Marks & Spencer led advancers in the FTSE 100 index shares with a rise of 3.3% followed by increases in Old Mutual of 3.2%, in International Power of 2.8%, in Cobham of 2.1%, and Admiral Group of 0.4%.

Man Group led decliners in the FYSE 100 index shares with a fall of 31.1% followed by losses in Vedanta Resources of 20.5%, in Eurasian Natural of 19.3%, in Invensys Plc of 17.6%, and BHP of 15%.

Commodity stocks fell after oil prices fell 7% to 60 per barrel and gold prices plunged 4.7% to $731.40 per ounce.

Copper also fell to a three-year low on speculation that demand will drop.

Media reports in UK and Australia suggested that Rio Tinto and BHP might cut iron ore prices by 15% in 2009 on waning demand in Asia. Rio fell 14%.

Europe Markets Review

In London FTSE 100 Index closed lower 258.32 or 5.70% to 4,272.41, in Paris CAC 40 Index decreased 230.86 or 6.38% to close at 3,387.25 and in Frankfurt DAX index lower 353.30 or 6.84% to close at 4,813.57. In Zurich trading SMI decreased 252.25 or 4.08% to close at 5,924.90.