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The immediate policy decision

30 Some members thought that the balance of arguments was in favour of a rise in interest rates of25 basis points this month, but attached different weights to the various supporting factors. First, forthose members who had contemplated voting for a 50 basis point increase in interest rates inNovember (rather than 25), there did not need to be much news on the month to justify a further25 basis point rise in rates now. Second, and related to this, the latest data did on balance suggest thecentral projection for inflation would be a little higher than thought a month ago. The latest evidenceon activity was at least as strong as expected a month ago, and suggested that the pace of outputgrowth might not slow as envisaged in the central case. In particular, world demand now seemed tobe strengthening, and some of the influences on UK consumption growth - wealth, real incomes andborrowing - seemed to have remained strong or to have strengthened over the past month. On prices,there had been signs of a compression of retail margins, and sterling had strengthened which wouldput further downward pressure on the price level. But the oil price had risen further. Third, theposition of the UK economy looked very different from when the last reduction in interest rates hadbeen made in June. It was unclear whether the 50 basis point rise in rates since the summer would besufficient to slow the economy to a more sustainable pace, and a rise in rates now might helpfullyaffect expectations. Fourth, the projection for inflation made in November had an upward slope atthe two-year horizon. The passage of each month meant that other things being equal the projectionfor inflation would be higher two years ahead. So even if there were no news on the month therecould be a case for a rise in interest rates. Fifth, in the view of some members, the risks of making abig monetary policy mistake were greater on the upside, and stemmed from the potential for thetightening labour market to begin to feed through rapidly to wages and prices, which suggestedraising rates sooner rather than later. Overall, the case for raising rates this month, rather thandelaying, was not a matter of urgency, but on balance the evidence pointed to the need for a furtherrise in the repo rate of 25 basis points. 31 A second view was that there was no need for a change in interest rates this month. On this view,the news on demand and output was broadly as expected at the time of the Inflation Report, albeitwith the risks perhaps now slightly more on the upside. The news on labour market quantities wasalso slightly tighter than expected. However, the likely short-term profile for inflation was ifanything a little lower than thought a month ago. Indeed, the downward effects on prices fromreductions in utilities prices, removal of fuel and tobacco escalators and increasing competition couldwell be larger than had been built into the published central projection in November. Overall, neitherthe news on demand nor that on prices this month was conclusive. The data continued to highlightthe same short-run trade-off puzzle between output and prices discussed last month in the Report andthe minutes of the Committee's previous meeting. Looking forward, the prospects were still forrising inflation at the two-year horizon, so a further tightening would probably be needed at some