Jeremy Warner's Outlook: Try as it might, Britain will struggle to resist global trend towards higher interest rates

Waterstone talks collapse again; Microsoft: uncertain future awaits
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The Independent Online

Nobody expects the Bank of England to raise interest rates when the Monetary Policy Committee concludes its two-day monthly meeting tomorrow, but it can at least now safely be said that the contrary prospect of a cut has faded into the indefinite future. As things stand, it is much more likely the next move will be up, quite possibly as soon as only months away.

Yesterday's clutch of statistics confirmed a much more upbeat view of the British economy than we have seen for some while now. Many of the problems experienced on the high street, which have instructed calls for a renewed easing in monetary policy, are as much structural as cyclical; the internet is making significant inroads into traditional high street sales, a phenomenon destined only to increase over the years ahead as broadband penetration grows.

One leading high street name tells me he expects as much as a quarter of the present retail market to be online within 10 years, possibly sooner. Such predictions would have once been regarded as strictly for the birds.

Today they look more than credible. Yet as the high street and other traditional industries decline in importance, other, newer industries are growing strongly, and the wider outlook for the UK economy continues to look relatively good. The Treasury forecast of 2 to 2.5 per cent growth this year already looks a little on the pessimistic side. Nor does the forecast of 2.75 to 3.25 per cent for next year look as ridiculous as it did when it was made in the Budget less than two months back.

The view that we in Britain could have falling interest rates at a time when virtually everyone else is raising theirs always did to me seem a little suspect. The only way of rationalising such a perspective is on the basis that we were a lot further forward in the cycle than everyone else. Yet ,perhaps regrettably, the time when domestic economies could forge along, ploughing their own distinctive furrow regardless of what was happening elsewhere, is long since gone.

Today, we are more a part of the global economy than ever before, and almost everywhere else in the world, from Europe to Japan and China, interest rates are rising. Even in the US, which has experienced a consumer and housing boom of proportionately equal duration and magnitude, rates may not be as close to the top of the cycle as previously believed.

In reported remarks, the new chairman of the Federal Reserve, Ben Bernanke, has been forced to concede that his testimony to Congress last week may have been misinterpreted as calling the top in the interest rate cycle. In fact, all he meant was that he would like to remain as flexible as possible, with policy determined by the data. To be accused of mixed messages so soon into his reign is not obviously a good start for Mr Bernanke after the sureness of foot displayed by his predecessor, Alan Greenspan. But that's by the by. The trend in interest rates internationally is still strongly upwards.

So far as Britain is concerned, most of the recent data has pointed to stronger growth. More worrying from the Bank of England's perspective, inflationary expectations are also rising. The pound doesn't look as robust as it was and energy prices are still off the scale. The MPC will continue to fence sit this week - indeed, as several of its members have already complained, there scarcely seems any point in it meeting at all as things stand - but the hawkish tendency will very definitely be in the ascendant once more.

Waterstone talks collapse again

Some say it's just three times, while others put it at as many as six. However many times it is that Tim Waterstone has tried and failed to buy back the bookstore chain that bears his name, he's now failed again. The recriminations yesterday were loud and mutual, with each side blaming the other for the breakdown in talks.

Alan Giles, the chief executive of HMV, puts the blame firmly with Mr Waterstone and his financial backers, Lazard Private Equity Partners, which he accuses of a loss of nerve. Mr Waterstone blames HMV for an unreasonable set of conditions which he claims scared off the financiers. HMV's agreement to a due diligence, but only on certain conditions, wasn't genuine at all, but just a honey trap.

Yet was it so unreasonable to ask for a 12 month moratorium on any further approaches if the talks fell through, or that the due diligence be restricted to 14 working days? Was it even that unreasonable to ask that Mr Waterstone agreed not to bid for Ottakar's, which HMV is planning to acquire itself if it doesn't sell Waterstone's?

According to Mr Giles, this is pretty much standard practice in such circumstances; Mr Waterstone and his backers are accused of looking for excuses to walk away. It is hard not to agree. Like Mr Giles, I too was a little sceptical when Mr Waterstone came riding over the horizon waving a cheque for £280m. Whether it is six times or three, he's tried to buy back Waterstone's on so many occasions before, but when push came to shove, was unable to find the money, that this just looked like more of the same.

The backing of Lazard's, and the quite full price that was apparently being offered, seemed to make this approach different. Now Lazard has scarpered at the first sign of resistance. How real was its interest in the first place? This is becoming a familiar tale with private equity. As boards grow more adept at defending themselves, and ever more demanding on valuation, deals are becoming well-nigh impossible to cement. Mr Waterstone is left with egg on his face, but the outcome is scarcely any better for HMV, whose strategic bind, assailed by the supermarkets on the right and the internet on the left, looks as intractable as ever.

Both sides look equally culpable. Mr Waterstone was far too aggressive in his approach, given that he needed the board's agreement to proceed. To say, as he did, that HMV's management of Waterstone's had been inept, hardly guaranteed a warm welcome. Yet there should have been a greater willingness on HMV's part to talk as well. As for Mr Waterstone, perhaps it will be seventh time lucky, or maybe eighth or ninth. Don't expect him to stop trying.

Microsoft: uncertain future awaits

Can big, established corporations ever hope successfully to make the leap from one transforming technology to another? The question has been raised afresh by Microsoft's announcement that it is significantly increasing its investment spending over coming quarters, particularly in the consumer-facing business of search.

Microsoft was late into the search engine game and, crucially, it was so blasé about the activity's potential to become a "real" business, that it contracted out the technology to someone else - Yahoo! In the past two years it has taken steps to reverse this mistake. In the past, being late into the market hasn't mattered too much. The power of the corporation, and its effective monopoly of the desktop computer operating system market, has allowed Microsoft to bulldoze all before it.

This time it hasn't worked. Microsoft has been unable to snuff out the search engine upstarts at birth, and, despite putting some of his finest brains on to the task, the chairman, Bill Gates, has also been unable to create a compelling rival to stand against Google and Yahoo! As the stock market has correctly surmised by marking Microsoft shares sharply lower in response to the enhanced investment announcement, pouring money into the task is unlikely to do the trick.

Search is still an embryonic business and it is indeed possible that, eventually, Microsoft will create something that's up there with the best of them. But it will only be one of several, a position it is not used to dealing with and may find acutely uncomfortable, particularly as the power of the Windows operating system begins to wane. In little more than 20 years, Microsoft has come from nowhere to be one of the most powerful corporations on the planet. Already, it's ability to sustain that position is under intense pressure. The natural life cycle of the major corporation seems to grow ever shorter.

j.warner@independent.co.uk

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