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FTSE slips back

06/09/2007

London's FTSE 100 index slipped back today after the Bank of England said it was "too soon" to determine to what extent the current turmoil on the world's financial markets would prevent consumers and companies from obtaining credit.

Traders appear to have been shaken by the Bank's decision to issue its first comment on an unchanged interest rate decision in more than eight years.

Announcing its decision to keep the UK's benchmark interest rate on hold at 5.75 per cent in a noon statement, the central bank stressed that it had considered the turbulence on the share markets as part of its mandate to keep inflation under control.

Indications that monetary policymakers are still unsure about how the credit crunch will impact upon the wider economy saw the FTSE fall 0.5 per cent by 12:40 BST.

Bank stocks recorded the heaviest falls, amid ongoing fears that they have most to lose as a result of the credit squeeze.

Current problems in the markets have been caused by rising default levels in the US sub-prime mortgage market, with traders fearing that the world's banks will be increasingly unwilling to make money available to both corporate borrowers and consumers if they make losses as a result of exposure to risky investments within the sector.

All eyes are now on the president of the European Central Bank (ECB), Jean-Claude Trichet, who is due to give a news conference explaining the bank's separate decision to keep interest rates for the eurozone on hold at four per cent. Traders will be waiting to see what assessment the head of the continent's central bank has made about the recent market turmoil.

Today's market falls come after the Bank of England announced yesterday that it would increase the amount of cash banks can deposit at the central bank in a bid to stop the credit scare hitting the markets further.

The move will allow lenders to build up extra savings, against which they can draw cash at the base rate of interest. As such they will be less reliant on overnight borrowing facilities, with interest rates for such borrowing having soared in recent days as banks become more reluctant to lend to one another in the wake of the credit crunch.

Investors appear to have been disappointed that the Bank of England did not choose to do more to tackle the market turbulence, but others have argued that it is not the role of monetary policymakers to intervene.

Commenting on the situation faced by banks and hedge fund managers, Liberal Democrat Treasury spokesman Lord Oakeshott told BBC Radio Five Live: "When they're making hay while the sun shines they don't want anyone to interfere, they want to have complete freedom to make the biggest profits they possibly can.

"Then when the clouds come out or it starts raining suddenly they want the taxpayer to provide an umbrella," he stressed.