FTSE dips despite Bank cut

By Michael Taylor

LONDON (Reuters) - The top share index ended a choppy session lower on Thursday after the Bank of England cut interest rates as expected and warned over rising inflation.

The FTSE 100 .FTSE ended 18.8 points or 0.3 percent lower at 5,965.1 after earlier touching a low of 5,881.9 as the Bank cut interest rates for the third time in five months to cushion the economy from the global credit squeeze.

The bank said the quarter percentage point reduction in its main rate to 5.0 percent was justified even though inflation was likely to spike in the short term.

"It's the right reaction," said Paul Kavanagh, a partner at stockbroker Killik & Co, who added that a positive start to trading in the U.S. had helped ease larger losses.

"They are playing a measured game. It's the style of the Bank and they are not deviating from their pathway. They have kept their powder dry and they were under intense pressure from everybody to take more dramatic action.

"It was the right decision," he added. "There is probably a 25 percent chance of a follow up rate cut next month but probably the preference is to keep things steadily on hold."

Banks were one of the biggest drags on the index, after Lehman Brothers LEH.N said it had liquidated three of its funds. Barclays (BARC.L), Royal Bank of Scotland (RBS.L), Alliance & Leicester ALLL.L, HBOS HBOS.L, Standard Chartered (STAN.L) and Lloyds TSB (LLOY.L) were all down between 1.5 and 5.8 percent.

News that Lehman Brothers had liquidated three floundering investment funds that lost value and ended up taking $1 billion (506 million pounds) of assets onto its balance sheet hit the sector already beaten by months of credit worries.