The heavyweight banks and miners dragged the FTSE lower this morning, while disappointing results from Diageo also weighed on sentiment.

Attention will be centred on the Bank of England's interest-rate decision at midday today where economists are pricing in the small chance of a rate hike.

BoE interest rate decision

The Bank of England meets at midday today to deliver its latest rate decision. Over the past year it was clear that the central bank would not move on interest rates due to the fragility of the economic recovery, but this has changed in recent weeks. According to Reuters, economists now see a 20% chance that the BoE will lift rates today. Fears that inflation may become embedded in parts of the economy have resulted in some economists calling for a rate rise earlier rather than later. Policy member Andrew Sentance has voted for a rate rise for some time now on concerns that the central bank is losing its credibility to control inflation expectations. At the last policy meeting Martin Weale became the second policy maker to vote in favour of a rate rise.

However, it seems unlikely that the BoE will move on rates at this meeting as it is still too early to determine the strength of the UK economic recovery. If the central bank were leaning towards a rate move they would be laying down the foundations now to prepare the market for the move. This has not happened yet as the Governor Mervyn King has been quite clear that he expects inflation will fall towards the end of the year and doesn’t want to risk undershooting inflation. If the rhetoric changes at this meeting this may begin to open the door for a rate rise in the coming months. At the moment May has been flagged as the month when the central bank may move on rates.

The details of the discussion will not be known until the minutes of the meeting are released on 23 February. In the meantime, if interest rates are put on hold today as expected then we could see a pull back in sterling from current levels.

UK equities

By 10.40am (London time) the FTSE 100 was 39.72 points lower (-0.66%) at 6012.57 and the FTSE 250 lost 87.25 points (-0.75%) at 11709.36.

Banks were broadly lower this morning with disappointing results from Credit Suisse dampening sentiment towards the sector. The Swiss bank lowered its profit estimate for the year in part due to tougher capital rules. Barclays, Lloyds and Royal Bank of Scotland were down 2.32%, 1.85% and 1.78% respectively.

Rio Tinto announced second-half profit this morning and more than doubled its full-year dividend. The mining giant saw net income climb to $8.5 billion in the second half, up from $2.4 billion a year earlier. However, this missed the $8.6 billion analysts surveyed by Bloomberg were forecasting and shares fell 1.31% to 4598p as a result. Full-year dividends were raised to 108 cents a share, up from 45 cents last year. The company also intends to buy back $5 billion worth of shares by the end of next year.

CEO Tom Albanese said that growth in emerging markets coupled with supply constraints should support the price of commodities in the coming year. However he also said that risks remain. ‘In particular, the timing and speed at which post-global financial crisis stimulus packages are removed have the potential to generate both volatility and substantial swings in commodity prices.’

Elsewhere in the mining sector, Antofagasta, Eurasian Natural Resources and Randgold Resources were lower this morning, tracking declines across commodity prices.

Shares in Diageo fell 4.55% to 1196p after the alcoholic drinks producer missed estimates. The company said like-for-like sales in the first-half rose 4%, missing the 4.5% consensus estimate according to Bloomberg. Net income was £1.19 billion which was below the £1.24 billion median forecast from analysts. Operating profit also missed at 2%, compared to 6.5% that analysts were looking for. Diageo struggled in the European market while North America returned to growth.

Medical device maker Smith & Nephew gained 1.69% to 724p after beating fourth-quarter expectations. Profit in the quarter rose to $278 million, or 20.5 cents a share, which was ahead of the 19.3 cents a share median estimate from analysts polled by Bloomberg. Sales were at the same level as a year ago at $1.07 billion, but this was still better than the $1.04 billion estimate analysts were expecting. For the year, sales rose 4% to $3.96 billion. Investors were taken by surprise by the announcement that CEO David Illingworth will retire in April after being in the job for a relatively short four years. Taking over the helm will be Olivier Bohuon, the CEO of French drug maker Pierre Fabre SA.

Autonomy Corporation gained 2.23% to 1607p after analysts at UBS upgraded the stock from ‘neutral’ to ‘buy’.