Outlook: As interest rates start to climb again, how far can they go?

At sea with BAE; ITV chairman; Air turbulence
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The Independent Online

Interest rates will be on the rise again by the end of this week. Of that there is no doubt, yet the question mortgage holders really want answered is how far they'll rise before they stop. If the Chancellor is right in his forecast of 3 to 3.5 per cent growth this year, then it is easily possible to imagine the base rate rising to 5 per cent or possibly even higher by the end of this year. The growth outlook in Asia and America looks good, but it still looks grim in Europe, our main trading partner. That means the economy must rely on domestic demand and investment to reach the Chancellor's above- trend projection, and that in turn would imply some overheating.

Interest rates will be on the rise again by the end of this week. Of that there is no doubt, yet the question mortgage holders really want answered is how far they'll rise before they stop. If the Chancellor is right in his forecast of 3 to 3.5 per cent growth this year, then it is easily possible to imagine the base rate rising to 5 per cent or possibly even higher by the end of this year. The growth outlook in Asia and America looks good, but it still looks grim in Europe, our main trading partner. That means the economy must rely on domestic demand and investment to reach the Chancellor's above- trend projection, and that in turn would imply some overheating.

Much more likely is that tax rises and job insecurity will continue to crimp growth, restricting the rise in interest rates to a ceiling of, say, 4.5 per cent. For most borrowers that wouldn't feel too painful. Elsewhere in the world, the outlook for rates looks benign, almost incredibly so. Japan shows no signs of abandoning its zero interest rate policy, the outlook for eurozone rates is if anything down, and there is no chance of an interest rate rise in the US anytime soon.

Don't read too much into the subtle change of wording used by the Federal Reserve when the Open Markets Committee met last week. By changing the wording from interest rates remaining on hold for "a considerable time" to being "patient" on rates, the Fed has increased its flexibility to respond to events, but it hasn't changed its stance.

At sea with BAE

BAE Systems once believed a transatlantic merger with one of the big American defence players would be its salvation. General Dynamics ruled out such a marriage some while back, but as long as Phil Condit remained at the helm of Boeing, the idea continued to look at least remotely possible.

Yesterday all such hope was dashed when his successor, Harry Stonecipher, called out of retirement to restore Boeing's reputation after a series of scandals, said he had absolutely no interest in buying BAE. The company was too vertically integrated, he said on a trip to London, and why would Boeing be interested in buying a company that made submarines alongside aircraft? You can see his point.

It's hard to know what Mr Stonecipher's comments might mean for BAE, but coming soon after the high-profile resignation of one of its non-executive directors over the company's obsession with forging a transatlantic deal, it doesn't look good.

The BAE strategy has always seemed to me sound enough in principle. The UK market will not in the long term be enough to sustain a company of BAE's size, while the European defence market remains too fragmented and subject to national control to allow BAE a reasonable foot in the door. For reasons of political sensitivity, other markets are becoming progressively more difficult to sell to. By contrast the US has the triple advantage of being the world's biggest defence spender, it is thought a trustworthy buyer of arms, and, of course, there is the special relationship.

Yet it takes two to tango, and the American defence contractors, presumably deterred by BAE's accident-prone history, just don't seem interested. The lack of a convincing plan B, the still unexplained sacking of the previous chief executive, and the company's failure to name a successor to Sir Dick Evans, BAE's old war horse of a chairman, makes the company seem all at sea.

ITV chairman

Just how long can it take to find a credible chairman for ITV? The head-hunters have been at it for more than three months now, and as the newly merged Granada and Carlton Communications start trading for the first time as a single entity on the stock market, there are still no puffs of white smoke emerging from ITV's South Bank headquarters as to who it might be. For what it's worth, the short list is down to five; Sir George Russell from Granada and Sir Brian Pitman from Carlton are said to be halfway through the interviewing, with the final decision now only weeks away.

One person at least can safely be ruled out. Inspirational leader that he is, and now available for job offers, not in a month of Sundays are they going to appoint Greg Dyke, former director general of the BBC. In many respects, he would be just right for the job, but even in a business as incestuous as the "mejia", it surely wouldn't be regarded as acceptable for the chief executive of the industry's biggest player to move straight into the chairmanship of his leading competitor.

Nor would it be obviously helpful to ITV to have someone who is openly at war with the Government in the hot seat. ITV has still got a way to go in negotiating a level playing field with other broadcasters, for unlike the BBC, BSkyB and Channel 4, it pays the Treasury hundreds of millions a year on top of corporation tax in licence fees.

There are also a number of public service broadcasting obligations which ITV would much rather be without. Charles Allen, the chief executive, sees it as a major part of the management challenge at ITV to get these obligations reduced. Mr Dyke's quarrel with the Government over Hutton shouldn't have any bearing on these matters, but is it worth taking the risk? The same thinking may lie behind the decision to rule out Sir Christopher Gent, former chief executive of Vodafone. He's got no particular quarrel with the Government, but his Tory leanings and connections are well known.

Mr Allen is determined to stay on as chief executive, despite the continued reservations of a number of his leading shareholders. His chances depend crucially on the choice of chairman. Too much of a hard man and Mr Allen will be axed in belated punishment for the fiasco of ITV Digital. Too much of a pushover and shareholders will scream blue murder, meaning he may end up getting the chop anyway.

My money is still on Lord MacLaurin, who can be trusted to make the right decision. Vodafone, where he is chairman, insists that he is not for sale. We'll see, but if not him, there's always Donald Brydon, who's vacating the chair at Amersham having sold the company to GE of the US for a fabulous price. An accomplished former City fund manager and astute judge of the difference between competent and flawed management, he too would make an excellent choice.

Air turbulence

Time to hit the ejector button at Ryanair? Some shareholders might think so, after a week that has seen a calamitous profits warning, the outline of an adverse court judgment over discounted landing charges at state-owned airports, and Michael O'Leary, the company's abrasive and sometimes abusive chief executive, insult just about everyone in sight from Brussels bureaucrats (not hard to do) to wheelchair users (more controversial).

Yet Ryanair without Mr O'Leary would be as hard to imagine as Dublin without the Liffey; the two of them are joined at the hip and separation might prove fatal for Ryanair, an entrepreneurial creation if ever there was one. Shareholders managed to eject Stelios Haji-Ioannou from easyJet, and he had a much larger shareholding in the company than Mr O'Leary does in Ryanair. But his departure was also, in part, voluntary.

Mr Haji-Ioannou felt he wasn't right for the maturer phase of development easyJet was about to enter and, in any case, he wanted to go back to the fun and excitement of the business start-up. There is, by contrast, no sign of Mr O'Leary wanting to give up the joystick. Indeed, attempting to wrest it from him would likely cause a nasty accident.

Ryanair has had a bad run of news and there may yet be worse to come. Yet Mr O'Leary is the marketing whiz that's made it all possible; it is largely his vision and drive thatput Ryanair where it is today. For better or worse, shareholders are stuck with him.

jeremy.warner@independent.co.uk

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