By Carla Mozee and Sara Sjolin, MarketWatch

BT Group warns; Bank of England holds key rate steady

Blue-chip stocks in the U.K. moved higher Thursday, extending gains as the pound slumped after the Bank of England cut its outlook for British inflation and economic growth.

Royal Bank of Scotland PLC shares were climbing as the lender settled a U.S. legal complaint over risky loans.

How markets are moving

The FTSE 100 index rose 0.5% to end at 7,700.97, scoring its highest close since Jan. 23, according to FactSet data.

The pound traded at $1.3486 versus $1.3547 late Wednesday in New York, falling after the Bank of England released its monetary policy decision. Against the euro, sterling bought EUR1.1338 compared with EUR1.1430 in the prior session.

What's driving markets

U.K. stocks rose after the Bank of England. as expected, left its key interest rate at 0.5% (http://www.marketwatch.com/story/bank-of-england-holds-key-interest-rate-at-05-cuts-inflation-and-gdp-outlooks-2018-05-10). The Monetary Policy Committee voted 7-2 to leave the rate unchanged. In its Quarterly Inflation Report, the bank cut its 2018 second-quarter inflation forecast to 2.4% from 2.7%, and its forecast for 2018 gross domestic product to 1.4% from 1.8%.

The pound hit an intraday low of $1.3460 just after the bank's update. A weaker pound tends to boost U.K. stocks as the FTSE 100 companies make the bulk of their revenue overseas.

Bank of England Gov. Mark Carney, in a news conference, said economic activity in the first quarter was hurt by poor weather conditions, but that growth likely has been better than reflected in recent data. If the economy strengthens in line with the central bank's forecasts, interest rates are likely to rise over the next three years, he said. Analysts said that means an August rate increase is still in play, depending on how the data turn out.

Another focus in the U.K. was Royal Bank of Scotland's (RBS.LN)(RBS.LN) nearly $5 billion settlement with the U.S. Department of Justice (http://www.marketwatch.com/story/rbs-to-pay-49-billion-in-settlement-with-department-of-justice-2018-05-10) over risky loans in the run-up to the financial crisis. RBS ended 3.8% higher.

"It's a happy day for RBS, with the DOJ settlement coming in well below what we had feared. Of the $4.9 billion fine, around $3.5 billion has already been provided for, so the impact on future earnings appears to be at the very low end of expectations," said Neil Wilson, chief market analyst at Markets.com, in a note.

"This removes the last great barrier to the government selling off its stake and we would envisage that the [U.K.'s Chancellor of the Exchequer Philip Hammond] will expedite the disposal of its 71% shareholding," said Wilson.

What are strategists saying?

--"It's easy to see why the Bank has not acted today, given the recent dismal run of economic data," said Phil McHugh, chief market analyst at Currencies Direct, in a note. "We now expect further pressure on sterling in the short term as we consider this a dovish hold. In particular, we see further downside pressure in GBP/USD with a move back towards $1.30 given the growing divergence between the path of U.K. and U.S. interest rates."

-- "Today's policy communications broadly indicate that if we see a sufficient recovery in economic data releases through Q2, the BOE would be content to get on with the job of normalizing bank rate again, with the next hike even as soon as August," said Victoria Clarke, economist at Investec, in a note.

Stock movers

BT Group PLC (BT.A.LN)(BT.A.LN) slid 7.4% after the telecommunications company cut its forecast for fiscal 2019 adjusted earnings and revenue (http://www.marketwatch.com/story/bt-group-to-axe-13000-jobs-warns-on-profit-2018-05-10). BT also said it's cutting 13,000 jobs over the next three years as it steps up its restructuring efforts.

Next PLC shares (NXT.LN) surged 6.1%, topping the FTSE 100, after the apparel and housewares retailer raised its full-year pretax profit guidance (http://www.marketwatch.com/story/next-raises-pretax-profit-guidance-2018-05-10)to GBP717 million ($971.5 million).

Read:Next's time has come in a tough U.K. retail scene (http://www.marketwatch.com/story/this-retailers-stock-has-jumped-in-2018-but-still-offers-a-good-deal-2018-01-13)

Randgold Resources Ltd. shares (RRS.LN) (RRS.LN) tumbled 7% as the gold miner said its first-quarter pretax profit fell 27% (http://www.marketwatch.com/story/randgold-resources-pretax-profit-drops-27-2018-05-10) because of lower gold sales and higher production costs.

Economic data

British manufacturing output fell 0.1% in March, a second straight monthly decline, dragged down by weaker electrical equipment and pharmaceutical production, the Office for National Statistics said Thursday.

The U.K.'s visible trade deficit widened to GBP12.28 billion in March, compared with a FactSet forecast of GBP11.2 billion and wider than February's deficit print of GBP10.4 billion.

 

(END) Dow Jones Newswires

May 10, 2018 12:05 ET (16:05 GMT)

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