Michael Harrison's Outlook: Three reasons why rates could go up - and one argument why they should stay put

Give Hornby's train set time to get going; Ryanair rumbled by the markets; Sick as an Aussie parrot
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The Independent Online

The nearer the Bank of England gets to tomorrow's decision on interest rates, the greater becomes the pressure on its Monetary Policy Committee to raise them. Yesterday delivered plenty more ammunition to justify an increase in the cost of borrowing. Nationwide says house prices are rising at their fastest rate in more than a year and Halifax is likely to paint a very similar picture later this week. Lloyds TSB reckons business confidence is at a nine-year high and the Purchasing Managers Index shows continued pressure on factory-gate prices.

In addition to what we already know - that growth is well above trend and inflation well above target - the latest evidence would seem to make a quarter-point rate rise a no-brainer. On top of all that, August for some reason seems to be the MPC's favourite month for acting. The last time rates moved was exactly a year ago - on that occasion in a downward direction. The last time before that was August 2004 when they went up a notch.

Why then, is there still a very strong chance that rates will remain unchanged come midday tomorrow? First, and most importantly, there is little sign of wage inflation in the economy. Partly, this is a reflection of rising unemployment, partly it is the result of an influx of cheap migrant labour from eastern Europe. Second, the inflation figures themselves are distorted by sharply rising energy prices. Strip these out and the underlying rate at which the cost of living is increasing is nowhere near as problematic. Indeed, there is an argument that high energy prices in themselves will tend to act as a brake on the above-trend growth we are witnessing.

There are two other factors to bear in mind. One is that there have been very few hawkish signals emerging from the MPC, which may be an important clue given that the Bank likes to signpost its intentions in advance these days to avoid unsettling the markets. The second is that the MPC is still two members short. It does not get back up to its full complement of nine until October. That is the time to bet on an increase in interest rates if the data continues to point in the same direction, not tomorrow.

Give Hornby's train set time to get going

Through a combination of luck and judgement, James Crosby resisted the temptation to lead HBOS into a contested takeover battle for Abbey National two summers ago. It was a decision which has served HBOS shareholders well. His successor, Andy Hornby, has been in the hot seat for all of one day and already the siren voices are calling on him to hit the acquisition trail. After all, the youngest ever chief executive of a FTSE 100 bank (he is a mere 39) surely cannot expect to spend the next decade sticking to his knitting and growing the business through organic means. Can he?

If Mr Hornby is as good as his word, then that is exactly what he intends to do. He argues that HBOS has ample natural scope for expansion without needing to be seduced into a big, empire-building takeover.

He says he has absolutely no intention of pursuing acquisitions, describing the species as "guilty until proven innocent". You rather know what he means. The vast majority of mergers destroy rather than create shareholder value. More often than not, they are designed to massage corporate egos, not enhance investor returns.

But if Mr Hornby is to justify his sceptical approach and find a use for the huge lumps of cash the business is throwing off, then HBOS will need to motor.

Its share of new mortgage lending has bounced back to what Mr Hornby regards as its "natural level" of 20 per cent. He reckons he can do the same in general insurance, bank accounts, credit cards, savings products and lending to small and medium-sized businesses. That will entail, very broadly, a doubling in HBOS's market share and a seven-fold increase in its SME business.

As one of the UK's Big Five banks, HBOS's market share ought indeed to be around 20 per cent. It is, however, a good deal smaller than its four rivals and lacks access to the same amount of capital to get it there. Where Mr Hornby reckons it can pinch business is by being the lowest-cost operator on the high street.

Any new chief executive deserves a honeymoon period. In the case of Mr Hornby, his impressive track record demands that he be given the opportunity to demonstrate that his strategy, and not that of fee-hungry investment banks, is the correct one.

Ryanair rumbled by the markets

Stop it, Michael, won't yer. Oh, go on then. The chief executive of Ryanair likes to tease his investors almost as much as he enjoys abusing his customers. He was at it again yesterday, warning that sky-high oil prices and price dumping by no-frills rivals could drive the airline into loss in the final quarter of the year. That would be quite a turnaround considering that Ryanair's average fares rose 13 per cent in the first three months of the year - not bad for a carrier committed to bringing the price of air travel down.

The last time Michael O'Leary came up with such blood-curdling stuff in early 2004, the share price performed an aerial stunt, diving by more than one-third. The market has since figured out the O'Leary method and yesterday the stock hardly reacted at all. Everyone now realises that such warnings of Armageddon are aimed not at investors but airline competitors. In essence, Ryanair is telling them not to even think about attempting to undercut it, because there will only ever be one winner.

The pre-emptive strike of two years ago worked a treat. The mother of all price wars predicted by Mr O'Leary miraculously failed to materialise and Ryanair profits continued to climb.

Given Ryanair's track record, who's to say that this happy state of affairs won't continue? Mr O'Leary loves to present himself as a simple soul. But beneath that artless exterior lies a past master of under-promising and over-delivering.

Sick as an Aussie parrot

Students of football history will recall that the original Wembley stadium was built on time and to budget by the same contractor, Sir Robert McAlpine, that recently finished Arsenal Football Club's new Emirates Stadium, again on time and to budget.

The contrast with the fiasco that has become the new Wembley stadium could hardly be greater. Multiplex, an Australian construction company with an otherwise perfectly decent track record which managed to build the Sydney Olympic stadium without problem, finds itself mired in legal disputes with its client over a project which is likely to end up being two years late and 100 per cent above the original budget.

Doubtless, there is blame on both sides. Multiplex accuses the FA subsidiary company, Wembley National Stadium Limited, of ordering 600 design changes. WNSL accuses Multiplex of botching the job - to take one example by using the wrong type of concrete. Forced to choose, I would have to come down on the side of the Aussies for having found themselves with the nightmare client to beat all clients. The farce over the selection and appointment of the new England manager demonstrated, if proof were needed, that the FA could not run a whelk stall. The new Wembley stadium is just a bigger version.

m.harrison@independent.co.uk

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