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mpc: 10

The immediate policy decision

27 Once again, there had been little decisive news over the month to alter the Committee's view on the underlying path of the UK economy. The projections in the August Inflation Report remained broadly intact, though the pace of earnings growth continued to be surprisingly modest given the rate of growth of employment and the pace at which unemployment was falling. Oil prices had eased in the past month and sterling had strengthened somewhat, but both were higher than expected at the time of the August projections. Nonetheless, the news on the month was on balance a little weaker. Despite the slightly stronger monetary, retail sales and index of production data, as well as the sharp fall in unemployment and the tick up in inflation expectations, equity prices had fallen significantly, earnings growth remained subdued, the survey evidence (including evidence on confidence) was on balance weaker and the RPIX inflation outturn was lower than had been expected at the time of the previous meeting. 28 On one view, while there remained arguments for an increase in the repo rate at some point these were not decisive. GDP was if anything growing a little more strongly than had been expected, though there were some signs that the growth of private demand was beginning to ease. This was necessary if the announced plans to increase government consumption and investment were not to place undue pressure on the productive capacity of the economy. Exports were remarkably buoyant, reflecting the strength of the world economy. Measures of domestically generated inflation were easing, but the downward external influences on UK inflation were now almost exhausted. The external factors which had allowed real wages to grow rapidly at a time of moderate growth in nominal earnings could not continue indefinitely. The evidence on labour shortages was mixed, but the market remained tight and it was unclear how long the benign outturns on earnings growth could continue. While the Bank's regional Agents reported few signs of increasing pay pressure and previous indications that wage negotiations might be becoming more difficult had not materialised, wage settlements had picked up in recent months. Unemployment was falling sharply, particularly amongst the short- term unemployed, and this could not persist without putting upward pressure on wages. Signs that inflation expectations amongst the general public and wage negotiators had increased were worrying and reinforced the view that upward pressure on wages was a substantial risk to the inflation outlook. Labour market conditions would need to be monitored very carefully for early