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mpc: 5 13 Equity prices had fallen by about 5% over the month, across a range of countries, but the reasons for this were not entirely clear. In the UK, it was possible that part of the fall was related to the increase in longer term interest rates. But that was not the case in other countries which had experienced a similar fall in equity prices. Profit warnings, especially in the high- technology sectors, had increased. To some, the common factor was the recognition by these markets of the possibility of a sharper slowdown in the world economy than had previously been expected. The interaction between the oil price and the equities market was important and the market could recover if the oil price remained stable. But any further rise in the price of oil could precipitate a loss of confidence and prompt a sharp fall in equity prices. 14 Sterling's effective exchange rate was nearly 2% above the level assumed at the time of the August Inflation Report and a little over 1% above its level at the time of the Committee's previous meeting. Against this background, the Committee discussed recent developments in the foreign exchange markets. One explanation of the strength of the US dollar was that it reflected the pressure of capital flows. These, it was argued, were taking place in response to beneficial supply side developments in the US economy and the profitable investment opportunities they had created. On this view, the strong dollar exchange rate and the US current account deficit were necessary counterparts of the capital inflows and could be sustained until those profitable opportunities were exhausted. There was as yet little evidence to suggest any slowing in this process of the reallocation of capital, which some on the Committee felt gave greater credence to the view that a sustained period of faster US growth could be expected. Others however suggested that even quite small changes in expected productivity growth could have large effects both on equity prices and on capital flows, so were less confident that the dollar would remain strong. While such effects might indeed account for the US dollar's strength against the euro, they were less convincing as an explanation of the weakness of the euro against sterling or the yen. It therefore remained difficult to find a satisfactory explanation of the current constellation of exchange rates.

Demand and output

15 The Committee had assumed in its projections in the August Inflation Report that consumer spending growth would begin to slow, as households began to rebuild their balance