Banks and retailers lift FTSE 100 index

The FTSE 100 edged up 0.2% and was set to extend gains into a third straight session

Shares of banks and retailers lifted UK's blue-chip FTSE 100 index on Tuesday, while Liz Truss prepared to take charge as the country's new prime minister amid fears around surging prices and a looming recession.

The FTSE 100 edged up 0.2% and was set to extend gains into a third straight session.

Some investors are alarmed that tax cuts promised by Truss could aggravate Britain's inflation problem, speeding up the Bank of England's interest rate hikes and worsening a recession that the BoE expects to start this year and end only in 2024.

Traders are expecting a 66.7% chance of a 75-basis-point hike by the BoE at its meeting next week. The rate-sensitive banking sector advanced 1.0%.

At the moment, at least, the market is tending to overlook the downside consequence of the recession and are focussing on the fact that interest rates are of a higher potential for banks and financial institutions to make more money, said Stuart Cole, head macro economist at Equiti Capital UK. Truss is planning a £40 billion support package for businesses to help them cope with rising energy costs, Bloomberg News reported.

Retailers climbed 4.2% and were on track for their best performance in more than three months.

The measures that have been taken not only in the UK but in Europe on energy priorities will see more income left in consumer pockets and so the potential is there for more to be spent in such items, said Cole.

Capping gains on the commodity-heavy FTSE 100, oil majors BP and Shell fell more than 1.5% each, tracking weaker crude prices.

The domestically focussed mid-cap index FTSE 250 rose 1.3%, erasing previous session's sharp losses. High-end housebuilder Berkeley Group Holdings rose 4.8% after saying underlying sales in the first four months until August were ahead of year-ago numbers.