A little bit of a shock at the January meeting of the Monetary Policy Committee. Whilst most commentators were expecting a rate rise in February (previously they had thought about March) no-one was expecting the 0.25% rise in January, bringing interest rates to 5.25%.

As always, whether it's Mervyn King of the Bank of England or Ben Bernanke of the US Federal Reserve, the future is in the minutes. What the outcome was is far less indicative than what was said at the meeting and why the decision was taken. For the UK, two points are significant:

1. The voting was 4 in favour of increasing rates and 4 against. As Governor, Mervyn King used his casting vote to increase them. This is the first time he has done this in almost a decade. He normally votes (in the event of a draw) to maintain the status quo.
2. In a speech in Birmingham, King later explained that he believed inflation would work its way out of the system by late summer, as the energy price effects reversed, thus making way for stable rates or even a small decrease.

That is all very interesting, but there is a strong body of opinion that rates will have to have at least one more increase, possibly even as early as February, to counteract or at least deter inflationary wage increases.

At the same time as the UK is raising rates and talking of more, in the USA they are floating the theory that the next move could be downwards. The combination of these two has recently pushed the GBP/USD exchange rate to 1.9913, its highest level since August 1992 (when it reached 2.0103). It is expected to hit or even break through the $2.0000 barrier in the next couple of weeks.

With current interest rates at 5.25%, what is the market's view about the future?

The best guides are the 3 month LIBOR (London Inter-bank Offer Rate) and 3 and 5 year Swap (fixed) rates. The first, at 5.35% (up from last month but coming down gradually in the last few days) suggests an impetus for possible further increase in the short term, whilst the 3 year Swap at 5.68% and the 5 year Swap at 5.57% reflect the market's view that interest rates have probably another 0.25% to go.

The market isn't always right of course, and our rates will be affected by what happens in the USA and the rest of the world, but for now there are still reasons to remain confident about the future.

House prices in the UK are reported to be still edging up, though the actual percentage amount varies depending on your source. It's perhaps a little early in the year to be calling the result for the full year, but it is generally felt that interest rate rises, whilst restraining some the greatest excesses, will not unduly dampen the market as a whole. My money is on 6.5%. There, I've said it now!

My reasoning is not based on sophisticated macro-economic theories, but rather on the crude imbalance between supply and demand. We are still not building enough of the type of property people want in the places where they want it (restricted supply) and our population is increasing very quickly (growing demand). The 6.5% average will of course hide a wide range from top to bottom. With one foot in a bucket of ice and the other in a bucket of boiling water your average temperature will be comfortably hot, though comfortable is probably the last thing you'll be! Don't trust averages to tell you very much.

Alternatively, we are continually bombarded with predictions of house price melt down but, whether it happens or not, as always, the key is to buy below market value.

To rely for your profit on the market as a whole increasing will never give you that extra wealth you are seeking. In the hunt for BMV (below market value) opportunities, one of the best places to look is the off plan market, increasingly overseas.

We can help you in your search!

www.viceroyinvest.com

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