London Market: Rate worries cast a shadow over shares

UK STOCKS and bonds are likely to fall this week, led by telecommunications and computer-related stocks, on concern that interest rates will go up again soon. The Bank of England is set to release the voting record of its Monetary Policy Committee meeting on 8 September, when it upped lending rates unexpectedly by a quarter point to 5.25 per cent. "The report is a big one," said Graham Campbell, a fund manager at Edinburgh Fund Managers. "People are concerned about accelerating growth and prices."

The bellwether 10-year government bond yield fell five basis points to 5.50 per cent last week. "The gilt market is likely to take evidence of a hawkish MPC badly [in securities with shorter maturities]," said Stuart Thomson, a strategist at Sutherlands Stockbrokers. "The Bank will need to get [its benchmark rate] around 6 per cent if it is serious about tackling house prices."

Economists expect the BoE will raise rates to 5.5 per cent in November, although a minority see rates remaining at 5.25 per cent until the year end. The forecast then is for rates to rise a further quarter point to 5.75 per cent by the end of March.

Interest rates "might not need to go up as high as the most pessimistic forecast", said Niru Devani at Threadneedle Investment Management. "We feel rates could peak at 6 per cent."

Vodafone AirTouch, the world's biggest mobile-phone operator, and ARM Holdings, which makes computer chips for mobile phones and hand-held computers, may fall. Telephone and computer-related stocks suffer when rates rise because investors become reluctant to pay the premium demanded for their potential earnings. Rate concern pushed the FT-SE 100 index down by 151.2 points last week, a 2.4 per cent drop.

Other stocks which may fall are Sema, Europe's second-largest computer services company; Colt, a provider of telecoms services to business; and Energis, Britain's largest carrier of internet traffic.

Tesco may rise when it reports first-half earnings on Tuesday, after saying in June it had a "solid" start to the year. A report last week showed UK retail sales rose 3.5 per cent in the quarter through August.

Rugby Group and Hewden Stuart are also due to report first-half earnings during the week. Both are construction-related companies and British house prices rose by an annual 9.4 per cent in August, the biggest increase in 10 years.