Tuesday lunchtime business bulletin

Jun 17 2008 By Andrew Mernin

Interest rates should not be increased to calm soaring inflation if the Bank of England is to avoid damaging the economy or knocking already fragile consumer confidence, top City economist Roger Bootle warned today.

He urged the Bank of England to hold off from a knee-jerk reaction to today’s news that inflation has rocketed well above target and is set to rise above 4% into 2009.

Mr Bootle told MPs at a Treasury Select Committee hearing that a rise in interest rates would have little direct impact on the cost of living, except to put cash-strapped consumers under further pressure.

Mr Bootle, managing director of Capital Economics, said: ``Out there in the real world, I’m not sure ordinary people would make a connection between monetary policy and inflation - at least as far as homeowners are concerned it’s just another thing that sounds bad.

``What it would do is increase expectations that the economy outlook may be quite poor. I suspect it would need quite a time to translate into lower inflation expectations."

Investors held their nerve today after inflation hit 3.3% and Bank of England Governor Mervyn King warned the figure could rise above 4%.

The City took heart from Mr King’s indications that interest rate rises to curb inflation were not set in stone and that the Bank’s rate setting committee had an open mind about the future direction for borrowing costs.

The FTSE 100 Index reached mid-morning 89 points higher at 5883.6, having started the session in positive territory. It made further progress after the release of Mr King’s letter to the Chancellor, which was a Bank requirement because inflation was now more than 1% above the Government’s 2% target.

Traders were also buoyed by forecasts for a healthy start to trading on Wall Street later today. That reflected hopes the US Federal Reserve will hold off from raising rates if inflation remains in line with expectations.

On a corporate front, Premier Inn and Costa Coffee owner Whitbread rose 4% as investors cheered the group’s first quarter figures.

Transport firm Wincanton today withdrew its offer for rival TDG after admitting a deal was ``not in the best interests of shareholders".

The Wiltshire-based logistics firm, which works for major retailers including Sainsbury’s, Asda and Argos, tabled a proposal worth £228.6m in April, bettering an offer made by investment firm Laxey Partners in February.

Wincanton carried out due diligence and said last month the board of TDG agreed there was merit in exploring the combination of the two businesses, in terms of operational overlap and sector and geographic coverage.

But Wincanton said today it was no longer interested in going through with its proposed offer for TDG, although it has the right to return if Laxey Partners or another third party agrees a deal with the TDG board.

Laxey has until the end of this week to meet a Takeover Panel deadline and declare whether it intends to press ahead with a takeover.