By Twesha Dikshit
(Reuters) -London equities edged lower on Friday, dragged down by heavyweight banking stocks after an independent think tank recommended taxing interest they receive from reserves held at the central bank.
The blue-chip FTSE 100 fell 0.4% by 0909 GMT, declining for a fourth consecutive day and was set for its biggest weekly loss in almost five months.
The Institute for Public Policy Research said taxes on the billions of pounds received by banks in interest would give finance minister
Rachel Reeves more room to meet her fiscal rules.
"Reeves has a potentially very large black hole to fill as far as public finances are concerned as we move towards the autumn budget," said Fiona Cincotta, senior market analyst at City Index.
"It's not something that is conducive to a strong business environment in the UK, but I can see how it may be an attractive option for the Chancellor given her predicament and limited options."
Banking stocks, down 2.4%, were the biggest drag on the blue-chip index. NatWest and Lloyds fell 4.5% each while Barclays lost 3.7%.
Providing support, defence stocks rose after German Chancellor Friedrich Merz said it seemed clear that there would be no meeting between Russia and Ukraine's leaders.
Rolls-Royce and Babcock added 1.6% and 1.3%, respectively.
The domestically-focussed midcap index was down 0.6% and set for its first monthly loss in five months.
Luxury fashion group Burberry fell 2.2% on the midcap index and weighed on the personal goods index. Watches of Switzerland was down 1.9%.
The FTSE 100 had touched a record high last week, tracking global markets after U.S. Federal Reserve Chair Jerome Powell signalled a possible interest rate cut at the central bank's September meeting.
However, concerns over the Fed's independence have pressured markets this week. Investors will track a key U.S. inflation data report and euro zone data later in the day for monetary policy outlook hints on both sides of the Atlantic.
(Reporting by Twesha Dikshit; Editing by Mrigank Dhaniwala)
