Last week in London

The London market made early gains last week as the oil price softened, reports Quentin Smith from OMAM UK.

What with the FTSE 100 trading above 4500 for the first time in a month, before giving up some ground later on, amid a lack of corporate news and the closure of the US market for the funeral of former president Ronald Reagan.

At its monthly meeting, the Bank of England’s Monetary Policy Committee raised its benchmark interest rate for a second consecutive month, by a quarter percentage point to 4.5%, to prevent record consumer borrowing and surging house prices from fuelling inflation.

The increase takes the main lending rate to its highest since October 2001 and marks the first back-to-back rise since the beginning of 2000. It also widens the gap with borrowing costs in the US, Japan and the eurozone.

The monthly HBOS house price survey showed prices rising in the three months to the end of May at the fastest annual pace since June 2003.

The average price rose 2.2% in May, giving a year on year rise of 20.4%, as borrowers’ appetite for debt has remained unaffected by three interest rate rises and Bank of England predictions that house price inflation will slow sharply over the next two years.

HBOS believes that strong demand and a shortage of supply is keeping inflation high.

Over the week the All-Share and the FTSE 100 both advanced 0.7%, with midcaps up 1.0% and smallcaps up 1.5%. The strongest sector performances came from consumer cyclicals such as autos, household goods and support services, with telecoms also among the leaders, while consumer staples and utilities were the weakest.

Royal Bank of Scotland (+0.2% to 1661p), the UK's second largest bank by assets, said that earnings would be in line with analysts' forecasts, as income rose faster than costs.

The bank's interest margin, a measure of the profitability of lending, narrowed from a year earlier because of its purchase of First Active, an Irish mortgage lender. Without First Active, the margin would have been stable.

RBS announced plans to increase its bad loan provisions because of higher defaults after increasing consumer lending. Repayments of corporate loans have improved, helping reduce the overall amount set aside.

May unemployment is expected to show further falls to record lows, as new job creations become more broad based, rather than being biased towards the public sector.