mpc.theyserveforyou.com

mpc: 9 restrained by higher market rates but the Committee then failed to raise rates, the market's view of the Committee's reaction function would change, storing up trouble for the future. 34 The Committee agreed that it should not place great weight on expectations of what the ECB and FOMC might do at their meetings on 4 November (the same day as the MPC's meeting) and 16 November respectively. It was noted that a clear majority of market participants expected the MPC to raise its rate by 25 basis points, in which case a move of that size would probably not have much effect on market prices. 35 The shape of the inflation projection had changed materially over the past year. A year ago, it had been humped; in May and August it had had a gentle saucer shape; now inflation was projected to fall further below the target, before rising more steeply towards the end of the forecast period. This reflected the view that accumulating inflationary pressures would surface after a period in which measured inflation was held back by a series of specific price level changes. In particular, after falling back in the short run earnings growth was likely to pick up further out in the forecast period. On the one hand, the degree of uncertainty about the outlook was considerably greater at the two year horizon, so that the Committee could be less sure about the projected steep rise than it could be about the nearer- term prospect of inflation remaining below target. On the other hand, monetary policy changes would have a greater effect on inflation at around two years than on nearer-term prospects. The Committee agreed that, other things being equal, the shape of the projection meant that, compared with a profile in which inflation rose steadily, there was more time to tighten policy in order further to restrain demand growth if that still proved necessary.

The immediate policy decision

36 The Committee agreed that the analysis of the outlook for inflation had changed over the past few months. The news on demand and activity had been stronger than expected, whereas RPIX inflation had been weaker than expected. The short-term relationship between output and prices had for some time been uncertain, and if anything that uncertainty had increased. For a long time strong domestically-generated inflationary pressures had been offset by strongly benign external influences: the price and net trade effects of the rising pound and of the shocks to world activity. Those external influences were now smaller. Sterling had recently risen slightly, but by less than during 1997 and 1998, and the world economy was recovering, with consequent rises in some input costs, for example oil. The key issues were now on the one hand the size and persistence of various downward influences