Outlook: More interest rate cuts loom. How much lower can they go?

P&O's cute game; Mobile optimism

Interest rates are already as low as any of us brought up in an age of inflation ever imagined they could be. The next movement was meant to be up, but over the past few days, the possibility of lower rates still has forced its way back on to the agenda. This is plainly going to be easier to achieve in Britain, where the base rate is still a comparatively "high" 4 per cent, than it is in the US. With the Fed Funds rate already as low as 1.75 per cent, how much lower can it go? Yet it is in the US, where the effect of falling stock markets is more immediately felt in the real economy, that the need is greatest. More cuts may be necessary to stem the sell-off, but is there any room left for cutting?

This will be the question swirling through Alan Greenspan's mind as he ponders the pros and cons of calling an emergency meeting of the open markets committee to send rates lower still. The most obvious worry is that it would smack of panic, and therefore only exacerbate an already serious situation. The other is that the Fed has perhaps only two more quarter-point cuts left, before the markets decide they are irrelevant anyway and move to plunge the US economy back into recession. Mr Greenspan has to be sure that the medicine will have some effect.

It has become customary among those who are meant to know about these things to dismiss the present downshift in markets as simply a valuation adjustment, a necessary and long overdue correction to the unsustainable heights equity markets reached at the turn of the century.

These, by the way, are the very same people who told you at the start of the year that the correction had already been achieved and that there would be modest gains in markets from there on in. How wrong can you get? What's more, a fall of nearly 50 per cent, taking stock markets back to levels not seen for more than six years, is one hell of an adjustment. Such things are unlikely to occur without seismic consequences. But let's assume that's all it is – a return to normality, or to more measured levels of economic and earnings growth. The problem is that in the US at least, investors and consumers have become accustomed to much more than normal. Their saving and spending habits are still based on the misguided assumptions of the boom.

This is where the casino-like environment of the stock market connects directly with the reality of the wider economy. If people start to feel markedly poorer, they may start saving more and spending less. Since consumption is the only thing keeping the US economy afloat, the consequences of such a change in habits could be catastrophic. These are uncharted waters, and nobody knows for sure what the effects will be. In the longer term, it might actually be a good thing if US citizens started saving more and borrowing less.

But that sort of moral judgement won't be uppermost in Mr Greenspan's mind. His whole being is bent on the immediate purpose of preventing the US slipping back into a second business downturn. After the terrible lessons of Japan, where the authorities responded to the end of the bubble by raising interest rates and jacking up taxes, it has become a religiously held belief among central bankers that business downturns can be prevented or at least curtailed through pre-emptive interest rate cuts. The theory is about to face its biggest test.

P&O's cute game

Unless US regulators unexpectedly drop a spanner in the works, it looks as if Carnival will be sailing home to victory in the two-way battle for the hand of P&O Princess Cruises. However, to do so it will first have to make some key changes to its offer. Neither eventuality was in the script when P&O began its transatlantic voyage all those months ago by signing up to an agreed merger with Carnival's US rival, Royal Caribbean. Carnival is so much bigger than Royal Caribbean in key markets that P&O took the view any bid by Carnival was unlikely to be allowed, either in Europe or the US.

Well, it hasn't worked out that way, and if, as expected, the US follows the Competition Commission in the UK and Competition Commissioner in Brussels in saying further concentration of the cruise market doesn't much matter, whoever eventually merges with whom, then Carnival, with the far superior fire power, is likely to win. It all rather calls into question the P&O board's judgement in signing up to the Royal Caribbean deal in the first place. Was P&O's intention a cosy little stitch up? That's what Carnival's chairman, Micky Arison, has always believed.

If the P&O board had had its way, shareholders would by now have voted through lockout terms with Royal Caribbean. Carnival would have been shut out for good. Instead, shareholders rebelled and adjourned the vote until the outcome of the regulatory deliberations were known. It looks as if they are right to do so. The terms of the original merger agreement with Royal Caribbean are so restrictive that P&O has never been able properly to explain its position. Since P&O cannot effectively defend itself, then we'll have to do it instead.

P&O's starting point was that Royal Caribbean would never have entered a bidding war it knew it couldn't win with Micky Arison's Carnival. The only way of getting Royal Caribbean to the table, and therefore securing best value, was paradoxically to agree lockout terms that gave Royal Caribbean comfort in believing Carnival couldn't counter attack. In the event, the terms were not as water tight as Royal Caribbean imagined, and Carnival has been able to gatecrash the party anyway. One way of looking at it, then, is that P&O has played a pretty cute game.

Much else has changed since the original merger agreement too, not least the fact that P&O's trading performance is steaming away in a manner which would have been regarded as wholly improbable in the immediate aftermath of 11 September. Few chief executives are able to say they will either meet or exceed market expectations these days. P&O's Peter Ratcliffe just did. Carnival will have to markedly improve its terms to be certain of success. It will also have to provide a dual listing structure, since many of P&O's shareholders would be prevented from owning shares in a US enterprise. Royal Caribbean's Richard Fain must feel like he's been used. His only hope of stymieing Mr Arison now is by persuading US regulators to block both bids, but after what the European Commission said yesterday, it's a slim one.

Mobile optimism

You won't have read about it amid all the gloom and doom of plunging share prices, but mobile phone operators have been quietly reintroducing handset subsidies into the market in recent months, and the result has been a mini-boom in sales of new mobile phones. This time around, the subsidy is being confined to subscription-only deals, and it seems to be working as intended in persuading consumers to upgrade from pre-paid to subscription deals. The end result may be quite marked improvements in average revenue per subscriber. It's almost certainly too early to call the turn for the mobile phone market, but there does seem to be a definite glimmer of light at the end of the tunnel.

jeremy.warner@independent.co.uk