The Kings Speech

This week is a big week for both the Governments Economic Policy and the Bank of England.

Whilst Cameron & Clegg large it up in Davos, (nice Swiss Ski Resort), meeting top bankers and world leaders to discuss growth, lending and bonuses  at the World Economic Forum, the latest GDP figures on the UK’s economic growth are released tomorrow followed by Bank of England Governor Mervyn Kings’ first speech of the year.

In the meantime there is a new Shadow Chancellor waiting in the wings keener to attack than Karen Brady smiling smugly at Football “pundits” Keys and Gray with that “I told you so” look on her face.

No doubt events in Davos are important but the real analysis will be on dissecting Mr King’s speech for clues on when he thinks interest rates may have to rise to combat the growing effects of inflation, or if the economic recovery is weakening to such a degree that such a change can be put off. The GDP figures will be especially interesting here.

The markets seem to have decided already that a rise is due pricing in, according to one of my city clients, a 0.75% rise this year.

Mr King will probably stick to his guns in the short-term at least about these inflationary pressures being temporary and about to rise further due to the VAT rise. Once the rate hits 4% however, the pressure could be intolerable and the markets could begin to make their own decisions deciding that the Bank of England no longer has the authority.

“Squeaky bum time” indeed, as one economist put it last week. Over to you Mr King…

For those in the property market however, the message could be interpreted that investing in property now, before rates rise, represents a good opportunity.

In very simple terms, keeping cash in a bank account whilst rates are so low and inflation is higher means that actually you are earning diddly squat, or very close to it, so putting this money into property may be a preferred option if you believe House Prices will not fall dramatically.

In areas like London and the surrounds a shortage of stock is helping to keep house prices stable and even if more properties do hit the market, these “high demand” areas look unlikely to waiver.

Coupled with historically low borrowing rates for mortgage finance, variable tracker rates from 1.99% and 2 year fixes from 2.65%, it really could prove to be one of the best times to buy in many a year.

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