Wednesday lunchtime business bulletin

May 14 2008 By Andrew Mernin

The London market was weighed down by weaker banks today after the sector made its latest cash call and expectations for lower interest rates were dashed.

Bradford & Bingley fell nearly 10% after performing a u-turn and unveiling a £300 million rights issue, while Halifax Bank of Scotland and Alliance & Leicester were 5% and 4% lower respectively.

The losses saw the FTSE 100 Index dip into the red by mid-session, losing 2 points to 6209.9. Buoyant mining stocks amid continued bid rumours within the sector prevented the index from falling further.

Banks dominated the fallers’ board, with gloomy comments about the inflation outlook from the Bank of England affecting sentiment. The Bank’s latest quarterly inflation report suggests the CPI rate will remain well above its 2% target in two years’ time if interest rates fall up to twice more this year to 4.5% as markets expect.

Alliance & Leicester lost 18.25p to 440.5p after analysts downgraded the stock in the wake of a trading update yesterday. HBOS slipped 23p to 462p and Royal Bank of Scotland was off 8.25p at 329.5p. B&B, which said last month it did not plan a rights issue, slumped 15.25p to 143.5p.

Sainsbury’s unveiled plans to boost non-food sales today, including through the launch of a new online venture.

The supermarket chain said it will be rolling out its online non-food website next year after spending £15 million on its development. It will allow the group to start taking on rivals Tesco and Asda’s fast-growing web sales operations for electrical goods, music and DVDs and homewares.

Sainsbury’s said it was also strengthening the chain’s in-store non-food offering. The company hopes to gain nearly £1.2 billion of extra sales in the category during the three years to March 2010.

To help achieve this, it said 60 stores over 60,000 sq ft in size will have around a quarter of their space given over to non-food products. Currently just two of the larger stores are laid out in this way.

Further rate cuts for struggling home owners and borrowers look unlikely this year as policymakers battle to control runaway inflation, the Bank of England signalled today.

The Bank’s latest quarterly inflation report suggests the Consumer Prices Index (CPI) will remain well above its 2% target in two years’ time if interest rates fall up to twice more this year to 4.5% as markets expect.

Even one more cut this year is by no means certain as the Bank’s forecast shows CPI undershooting the 2% target by the narrowest of margins in two years’ time if borrowing costs remain unchanged at 5%.

The warning comes in a gloomy set of forecasts which predict CPI could spike as high as 3.7% this year and remain above 3% until well into 2009 - prompting a succession of open letters to the Chancellor from Bank Governor Mervyn King to explain the rise.

With inflation under pressure from surging oil, food and household energy bills - as well as a weaker pound - growth is at the same time expected to fall as low as 1% this year.

This fall is well below official Treasury predictions and comes as the credit crunch bears down on lending, house prices and consumer spending, slowing the economy.

The pound at 10am was US$1.9430 compared to US$1.9461 at the previous close while the euro at 10am was £0.7936  compared to £0.7971 at the previous close.