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mpc: 11 and pharmaceutical goods. Consumer demand for Millennium events had also been weaker than had earlier been expected by contacts. A43 Manufacturing investment had continued to be targeted at productivity improvements and opportunities for overseas production. There had been mixed reports regarding IT investment. Some firms had reported a pause ahead of the New Year, but it was widely expected that IT investment would pick-up strongly from January. Reports of increases in input prices had become more widespread, but manufacturers had continued to find it difficult to pass these price increases on, and margins had been squeezed further. This had been particularly true for export-orientated firms. Downward price pressure had continued in most parts of the retail sector. A44 There had been evidence of a further tightening in the labour market. Skill shortages had continued to increase, particularly in the southern regions of England. In many service sector industries, forthcoming settlements and other pay awards were expected to be higher than a year ago, reflecting skill shortages and greater profitability. But in other sectors, such as engineering, where profits had been relatively weak, settlements were expected to be rather lower than in services. It was widely expected that any upward pressures on wages would have to be absorbed by the employer.

VII

Market intelligence

A45 Market expectations of, and uncertainty over, future interest rates in the UK, the US and the euro area ­ as measured by the implied rates and implied volatilities on short term interest rate futures respectively ­ had fallen in early November, following the rises in official interest rates. The fall in implied volatilities had been greater than that usually seen following monetary policy announcements. A number of possible reasons for these declines had been suggested in the markets, including a view that interest rates may not be changed again until the New Year, and improved confidence that liquidity needs across the Millennium would be met. A46 Interest rates implied by UK short sterling futures had risen again later in the month. This had reflected renewed uncertainty about near-term rate prospects following the publication of the MPC minutes, reported rises in house prices, upward revisions to international growth forecasts,