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mpc: 3 7 More generally, since August the sterling yield curve had steepened, with rates in the two-to-five year range up by at least 50 basis points and the gap between fixed and variable mortgage rates having closed. This had increased the cost of borrowing for both companies and fixed rate mortgage borrowers. This would help to restrain demand in the medium term, and on one view was not fully reflected in the forecast. Others felt that the effects were likely to be small. (The Committee's discussion of whether the shift in market interest rate expectations had more general implications for policy setting is summarised below under `Tactical considerations'.) 8 The Committee agreed that final domestic demand could not continue to grow at the current rate without jeopardizing achievement of the inflation target in the medium term. Even without further monetary tightening some of the factors mentioned above were likely to restrain domestic demand growth. The Committee's latest projection incorporated a slowdown to around 3% by the end of the two-year forecast horizon, but that would probably still place pressures on supply capacity unless the contribution to GDP growth from stockbuilding and net trade was negative. 9 Stocks had been reduced in the first part of the year, consistent with reports of excess inventory holdings at the end of 1998. More recent reports suggested that there was little reason to expect a continuing negative contribution to GDP growth from this source in the short run. 10 The principal influences on net trade pointed in different directions. On the one hand, sterling continued to be strong, and was higher than in August. On the other hand, the world economy was recovering more quickly than expected. Exports of goods (excluding oil and erratics) to countries outside the EU had grown at an annual rate of 11% between Q2 and Q3; and total goods exports grew by 6% in the three months to August compared with the previous three months. Surveys suggested that manufacturers' expectations of export volume growth were higher than for around three years. 11 While it was possible that the strength of the recent exports data partly reflected temporary factors, it was also possible that exporters had to some extent adjusted to a level of sterling that they now expected to persist. If so, the equilibrium real exchange rate might have risen, but it was too early to be at all confident about that possibility. 12 To the extent that export strength were to persist, a negative contribution to GDP growth from net trade would have to come from a relatively faster increase in imports, so that the UK would in effect be relying on spare capacity abroad to contain incipient inflationary pressures from strong domestic