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FTSE closes lower amid growing interest rate fears

LONDON: Britain's leading FTSE index ended one percent lower on Friday as further evidence of a strengthening U.S. economy and steady growth in the UK fanned fears that interest rates will rise more than expected.

The FTSE 100 finished 1.02 percent or 65.4 points down at 6,375.6, having touched a session low of 6,354.8 and a high of 6,475.1.

"The market was expecting rates to go up a quarter point or half point here and there but the central forecasts are now more like 100 points over the next few months," said ABN AMRO European equities strategist George Hodgson.

"People have been expecting evidence of a slowdown in U.S. growth and yet again it hasn't appeared. The pressure is on the Fed to do more rather than less," Hodgson said.

Above-forecast fourth quarter U.S. employment cost and gross domestic product numbers indicated a strong momentum in the economy and that growth was pressuring prices. The news fuelled fears that Federal Reserve bank may aggressively hike interest rates next week.

Federal Reserve Bank Chairman Alan Greenspan -- known as a close observer of wage-level inflationary pressures as shown by the Employment Cost index -- may now raise rates by more than current forecasts of a quarter point.

The Fed's policy setting group, the Federal Open Market Committee, meets next Tuesday and Wednesday, and is widely expected to raise the federal funds rate to 5.75 percent from 5.50 percent.

Wall Street, however, has been nervous for weeks that the strength of the economy will persuade the Fed to tighten by 50 basis points to cool the economic growth. And the latest data fanned those fears. Profit takers crept into the London market earlier, as in-line UK fourth quarter GDP data failed to dispel fear of looming interest rate rises next month. Britain's Q4 GDP jumped 2.7 percent year-on-year from 1.9 percent in the third, the strongest rate in almost two years.

Meanwhile, new lows for the euro against the dollar boosted expectations that the European Central Bank will also push rates up, dealers and strategists said.

With the Fed's decision on rates not due until late on Wednesday and the Bank of England's decision not until February 8, the market looks set for a jittery and volatile start to the week, dealers said.

Strategists said that looking forward, whatever U.S. and UK markets make of central banks' decisions, the overall pressure on the FTSE would remain downwards as long as the top of rate cycles -- at home and abroad -- stayed hidden from view.

Chartists backed up this long-term bear view.

Royal Bank of Scotland technical analyst Brian Kiely said the FTSE was due for a sideways crab in the short-term, but that as weeks go by a long-term developing bear trend would take hold and force the index progressively lower to 6,262, 6,250, 6,109, 6,000 and finally 5,800.

Bucking the trend, pay-TV company BSkyB added a notional 10 points to the FTSE and was top riser among the blue chips, gaining 10.2 percent on volume of more than nine million shares.

The stock rose after Vivendi denied Thursday's Independent newspaper report that it intended selling its 25 percent stake, dealers said.

The Independent said the French media giant planned to sell its stake although analysts said Vivendi has never said it planned to sell its stake and would rather increase it if it could.

Drug stocks were the best performers of all the blue-chips as industry analysts upgraded shares after U.S. President Bill Clinton avoided overt criticism of the pharmaceuticals industry in his State of the Union address.

Many investors had feared he would use the high-profile address, broadcast late on Thursday, to announce an aggressive drive to force down the price of medicines under the Medicare programme. In the event, there were no nasty shocks.

"The State of the Union address set out the parameters for Medicare reform, which was one of the biggest negatives for the drug sector, and there is essentially nothing new in there," said Donaldson, Lufkin & Jenrette analyst Chris Spooner.-Reuters