European shares lost more ground yesterday to hit their lowest point so far this year after the European Central Bank reinforced its willingness to raise interest rates to counter inflation.
The FTSEurofirst 300 index of top European shares lost 0.85 per cent to close at 1,436.77 points, with banks, oil and chemical shares among the worst performers.
The ECB and the Bank of England kept rates steady but ECB president Jean-Claude Trichet struck a hawkish note, saying the bank was "in a position of total alertness" and it was prepared to act pre-emptively to counter upside risks to price stability.
Analysts said an equities-friendly rate cut was off the agenda right now, but the ECB's bark was likely to be worse than its bite.
"Trichet is still sounding very hawkish judging by his warnings of higher inflation and his threat that the ECB would be prepared to act pre-emptively to cap any further inflation pressure," Bear Stearns said in a note.
But, it added, it expected the pendulum to swing towards lower ECB rates from May onwards.
Dutch bank ING said in a note: "With growth likely to slow further, the credit markets still in turmoil and the euro hovering around record highs, it would be politically impossible for the ECB to actually tighten monetary policy."
Banks slipped. Alliance & Leicester fell four per cent, HBOS slipped 4.3 per cent and Barclays lost 1.3 per cent.
Bradford & Bingley lost 3.5 per cent on market talk it had requested emergency funding from the Bank of England. The bank denied the rumours, saying it continued to be well funded.
The FTSEurofirst 300 could only manage a 1.6 per cent increase last year, a tenth of its gains in 2006, with investors spooked by a credit crisis stemming from a meltdown in the market for US subprime or risky mortgages.
And it has got off to a nervy start this year, losing 4.6 per cent in seven trading sessions, of which five have been down days.
Contributing to losses yesterday were heavyweight oil shares, which tracked a $2 fall in crude prompted by fears of an economic slowdown.
BP fell 0.9 per cent, Royal Dutch Shell lost 1.3 per cent and Total dropped 1.7 per cent.
Chemicals shares fell sharply, with Switzerland's Clariant leading the way with a seven per cent slide, while Akzo Nobel dropped five per cent and industry bellwether BASF lost 4.8 per cent.
Traders attributed the fall to a bearish brokerage report on US cyclical chemical stocks.
Two retail groups were among big gainers, with both Britain's J. Sainsbury and Germany's Metro jumping 6.3 per cent after issuing bullish updates.