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mpc: 10 A41 Manufacturers had continued to find it difficult to pass on increases in input prices, and margins had been squeezed further. In the service sector, input price increases remained easier to pass through to consumers. There had been further downward pressure on retail goods prices, particularly food, clothing and electrical goods. Manufacturing pay settlements in early 2000 were expected to be no higher than a year earlier. But stronger pressure had been seen in the service sector, mostly reflecting skill shortages. City bonuses were expected to be much higher than last year.

VII

Market intelligence

A42 Market expectations of official UK interest rates implied by short sterling futures contracts had risen since the previous meeting of the Committee; most of this movement had occurred in early January. A large majority of market participants expected the Committee to increase official interest rates by 25 basis points at its next meeting; a few predicted a 50 basis point rise. Interest rate expectations had also risen sharply in the US and euro area, with futures contracts implying that interest rates in each would be increased by a total of 50 basis points in the first quarter of 2000. The smooth transition to the Year 2000 had reinforced expectations of rate rises, particularly in the US. Data releases in the UK, US, and euro area had been interpreted as signalling stronger global economic prospects. A43 Sterling had appreciated against the dollar during the month. It had risen less against the euro, although in late December sterling had reached a new high against the euro. Some market participants had commented that they expected the euro to appreciate over the next year. Data releases indicated that the German economy was recovering, and structural reforms in the euro area were in prospect. On balance, market forecasts for 2000 were for the sterling-dollar exchange rate to remain broadly stable, and for the euro to appreciate against both sterling and the dollar.