City caution after Chinese rate rise

China's decision to raise interest rates and the possibility that the UK will follow continued to trouble investors yesterday as the FTSE 100 Index closed in the red.

The Footsie closed some 39 points or 0.6 per cent down at 6,052.29, as cautious traders awaited today's interest rate decision from the Bank of England's monetary policy committee. The bank is widely expected to hold rates but the possibility of a hike has unnerved investors.

Angus Campbell, head of sales at Capital Spreads, said: "Because expectations are for a rate hike at some point over the next few months, there is certainly a risk that there could be one (today], so investors as a result are finding an excuse to pull back a bit."

Sentiment was also weakened by comments from US Federal Reserve chairman Ben Bernanke, who warned that failing to reduce the US government's $1 trillion (622 billion) deficit could hurt economic recovery, and the Footsie saw a late dive on the news. The pound rose to $1.60 against the dollar, as Bernanke's comments put the greenback under pressure, but weak UK trade figures saw sterling dip against the euro to €1.17.

Mining stocks suffered as falling metal prices combined with investor fears over the impact that the tightening of China's monetary policy may have on demand for commodities.

Copper company Kazakhmys dropped 53p to 1,569p, Eurasian Natural Resources fell 17p to 1,012p and Anglo-Chilean Antofagasta was down 57p at 1,456p.

Banking shares reacted positively to details of a deal between the Westminster government and the industry, which emerged from the "project Merlin" talks.

Chancellor George Osborne said the settlement would see bonuses cut, lending to small business increased and the pay of the highest paid executives published.

Royal Bank of Scotland was up 0.2p at 44.3p, Barclays added 2p to 316.4p and HSBC advanced 4.9p to 723p. Lloyds, however, dipped 0.5p to 65.4p.

Household goods giant Reckitt Benckiser, which owns brands including Cillit Bang and Dettol, was near the top of the fallers' board after it disappointed investors with fourth quarter results showing a 3 per cent drop in operating profits. Shares in the blue-chip stock fell 5 per cent or 175p to 3,270p.

Outside the top flight, shares in the London Stock Exchange raced ahead after it unveiled a deal to join forces with the owner of the Toronto Stock Exchange.

The proposed combination, which will create a leading trading platform with more than 6,700 listings, helped LSE's shares lift 3.1 per cent or 28p to 920p in the FTSE 250 Index.

LSE shareholders would control 55 per cent of the shares in the combined entity.

There was further woe in the publishing sector after Daily Mail & General Trust reported 332 consumer media job losses for the three months to 2 January as revenues and circulation continued to fall. Shares dropped nearly 3 per cent or 17.5p to 577p.

Among the Scottish companies, Aim-listed Braveheart was up 26 per cent to 37.5p on the back of a spate of recent announcements.