London market: Stocks to rise as rate fears subside

FT-SE 1

STOCKS will probably rise, with BT and Lloyds TSB leading phone and bank stocks higher, as concern eases that the Bank of England will raise interest rates in the coming months.

A report on Friday showed that Britain's services industry moderated in August and companies cut prices for the second consecutive month, suggesting the Bank will freeze the 5 per cent benchmark rate for a month or more. "There's been an over- reaction," said Ian Carstairs at Invesco Fund Managers. "Why should they put rates up?"

The FT-SE 100 rose 2.2 per cent on Friday to 6,332.1. Still, concern that rates would rise left the FT-SE 0.8 per cent lower on the week.

Investors will be looking for signs of mergers and acquisitions as companies combine to cut costs and extend product ranges. NatWest Bank and Legal & General said they were in talks that could lead to the acquisition of the insurer. Smith-Kline Beecham and Glaxo Wellcome could extend gains as long-running speculation about a merger was rekindled by Lehman Brothers analyst Ian Smith, who said "the industrial logic of a merger remains".

Gilts may rally, with the Bank of England expected to keep rates on hold when it meets this week. "Things should probably stay pretty good for gilts," said Neil Parker, senior economist at Royal Bank of Scotland. "No one should expect a hike this week." He recommends buying interest- rate futures contracts, which will rise in price as investors scale back expectations for how high rates will climb.

Bonds declined last week, as reports showing that the housing market is booming prompted speculation about higher rates. The yield on the 10- year gilt climbed 15 basis points to end the week at 5.30 per cent.

Figures last week showed house prices rising at their fastest level in a decade, mortgage lending at a record high, and the construction industry expanding. That might prompt the Bank to increase its lending rate. Still, recent comments from Bank policy makers DeAnne Julius and Sushil Wadhwani show they think rates are fine where they are.

Economists are split on whether the Bank will raise rates before the year-end. "Underlying inflation remains below target," said Nick Stamenkovic, bond strategist at IDEA Global. "That makes it hard for them to raise rates. I don't think they will rise ahead of the year-end, but you can't rule it out."