China interest rate hike weighs on UK miners

Britain’s benchmark stock index slipped back into negative territory on Tuesday, as miners weighed after China hiked interest rates for the second time in just over a month.

By 10:50 am, the FTSE 100 index of blue-chip shares slid 0.23%, or 14 points, to 6,037 and the Mid-250 index dropped 0.08%, or 10 points, to 11,801.

The People's Bank of China, which is trying to combat rising inflation, said its benchmark one-year deposit rates would be lifted by 25 basis points to 3%, while one-year lending rates would also be raised by 25 basis points to 6.06%. Developed countries such as Britain need demand from China, one of the world’s fastest-growing economies, to lift them out of their sputtering recoveries.

Mark Williams, China economist at Capital Economics, said the announcement had been widely expected. ‘The announcement may cause jitters about the impact tightening will have on Chinese growth but these should not be overplayed,’ he added.

China raised interest rates twice last year – most recently on Christmas Day, after inflation scaled 5% in November. The country also ordered banks to set aside larger reserves on six separate occasions.

In the wake of China’s rate decision, Xstrata slipped from the leaders board the FTSE 100, dropping 8p to £14.59. The miner had risen earlier after saying its full-year net profits soared nearly sevenfold to $4.69 billion (£2.91 billion) and that it would raise its final dividend to 20 cents a share. Net debt fell 38% to $7.6 billion.

Xstrata said the earnings were mainly due to restructuring activities undertaken during the economic downturn, and said it remains on track to achieve its growth targets.

Other resources stocks dominated the losers board. Eurasian Natural dropped 22p to £10.22, Fresnillo shed 28p to £14.21 and Kazakhmys fell 29p to £16.02.

UK economic data

Earlier in the day, data showed that while UK retail sales rebounded in January, house prices continued to drop. The Royal Institution of Chartered Surveyors said a balance of 7% of surveyors reported a decline in new buyer enquiries last month, amid concerns that the Bank of England will hike interest rates in the near future.

Analysts at ING noted that the data also showed that house prices fell at a slower pace. However, they noted that, ‘We remain concerned that with employment falling again, real wages contracting significantly, benefits being cut and taxes going up, real household disposable income will be negative this year.

‘In this environment it is very difficult to generate growth in consumer spending, be it retail sales or house purchases.’

The Bank’s rate-setting committee is due to reach an interest rates decision on Thursday. Despite pressure to act in order to curb rising inflation, it is expected to leave rates at historic lows for the time being, although policymakers are likely to be more divided on the move than they have been in years.

European markets were mixed: Germany’s DAX index gained 0.26% to 7,303 and France's CAC 40 index rise 0.1% to 4,095, but the FTSEurofirst 300 index of top European shares shed 0.33% to 1,173.