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mpc: 7 weight on the momentum implied by the recent numbers, then that would imply a less sanguine viewof prospects for the Japanese economy. 23 The news on activity in the rest of the industrial world, including the euro area, was either in linewith or slightly more positive than expected over the past month. There seemed little news inemerging markets over the past month that would materially affect the prospects for UK inflation. 24 Turning to the pattern of exchange rates, the recent German data had contributed to a slight risein the euro over the days leading up to the Committee's meeting, though over the past month as awhole the euro had weakened further against the dollar. Sterling's effective exchange rate had notchanged much since the time of the November meeting, but was around 1% above the fifteen-dayaverage used as a starting point for the projections. That strength was primarily against the euro,rather than against other currencies, reflecting more buoyant views of prospects for activity in the USand UK. Relative movements in yield curves over the period could account for some of sterling'sappreciation against the euro. Markets had now had a chance to adjust to the interest rate increasesin the United States, the euro area and the United Kingdom over the past few months. There hadbeen no immediate major effects on financial markets. Compared with some people's priorexpectations, market activity still seemed to be quite well sustained as the end of the yearapproached.

The labour market

25 The latest labour market data had by and large been as expected. There was, however, someconcern among some of the Bank's regional Agents' contacts about prospects for the coming payround. The Agents were also finding more widespread evidence of skill shortages, which had beenbuilding since the spring. But neither this nor any of the other survey evidence on skill shortages hadyet fed through to the observed earnings data. It was possible that the sentiment being picked up bythe Agents was rather more about a general desire for more highly trained and educated workersrather than a cyclical point about tightness in the labour market. 26 Some data presented by Bank staff on employment transition probabilities - flows out of variouscategories of inactivity - had highlighted a large number of people flowing from the category of `notwanting a job' into employment within a short period of time. At first sight this was rathersurprising, but might be explained by people seeing new job opportunities become available whichthey had not previously expected. More research was needed in this area, but so far it suggested thatthe pool of people who could move into employment was greater than might be thought based onmore traditional and more narrowly focused measures of potential labour supply. It might help toexplain why labour tightness had not fed through to earnings as fully as might have been expected.