You can tell it`s a new year – thin markets, volatility, and the immediate rebound of the `turkeys` of last year, aussie dollar, Japanese yen and gold. This Xmas/new year period has always come with a huge health warning attached and therefore reasoning and looking for answers as to `why` are irrelevant for a few days – as we have been continually saying `enter at your own risk`!

In the semi-real world of statistical information a couple of real pieces of data have been published, and the most notable of these is the Nationwide house price survey in the UK. No revelations in this; much as expected if not particularly welcome because of the challenges it poses. One of my new year resolutions was to try and get excited about the prospect of a possible rise in interest rates of 0.25% in about 6 months time, and reading some of the press coverage of the survey, that is precisely the angle they are coming from! So here goes…

The orthodoxy is that higher house prices gives the good old consumer the fabled `feel good factor`, therefore people feel better off, therefore household spending will rise, therefore putting upwards pressure on prices therefore stoking inflation, and therefore making it more likely that interest rates will go up sooner than the Banks forward guidance suggests and therefore sterling will strengthen accordingly, and there is historical evidence to enforce the broad validity of that sequence.

The Bank is very well aware of the contribution of the consumer towards GDP, and as I have said previously, I believe they will express concern about the rises in property value, but will certainly not do anything to kill the trend stone dead. Property values shouldn`t necessarily be, but have been, one of the cornerstones of the recovery, and investment spending and confidence is not going to be a substitute at this stage. The Bank will try and target a yoy rise of about half last year`s appreciation by taking a number of small steps to curb demand, but that is going to be a very un-precise exercise with little in the way of experience to lean on. It is important that the Bank does – at an early stage this year – start to implement these braking mechanisms because the danger lies in another boom and bust scenario centred around house prices and interest rates. Despite constant warnings, the average Joe has suddenly found it affordable to buy a house – not because he is more secure in his job, not because his real wages have gone up but because he can borrow at hitherto unheard of, bargain basement rates. The warnings of affordability get lost in the promised land of potential property appreciation, and fears of not getting on the house price ladder. Bubble time, and huge danger to the economy if rates rise suddenly.

The only way this cannot end in tears is to create a climate where it is not that concerning nor interesting when rates will start to rise, but for the populace to trust that when that rise comes, it will be in isolation, and not the pre-cursor to rates going back to 5% in two years time – therein lies the nub! The Bank will rely on the government to maintain a tight fiscal stance whilst completing the macroeconomic circle with continued loose, accommodative monetary policy. This mix has worked well, but will it stand the test of winning an election? Any sign of a connected loosening in fiscal policy will be guaranteed to put even more real and urgent pressure on the Bank to raise rates, with the associated wider effect on affordability and the consumer. On the plus side, inflation is under control, and the slack in the labour market looks an effective – if unsavoury – restraint.

So it IS mildly interesting to speculate as to when rates will start to rise, but it is much more important to the economy and to the currency, to manage perceptions of what happens after that event. If we do see a potential loss of control, and a real threat of sharply higher interest rates, this will be negative for sterling because of the previously described growth implications. Pre-emptive action on the housing market will take place at the Bank – that can be relied upon – but the crux of the next 12 months will be about central government policy and how successfully they can sell the message of continued tight fiscal policy, and with that policy, win an election! It is not going to be easy…