mpc.theyserveforyou.com

mpc: 10 difficult to pass through to output prices. However, many contacts had suggested that continued productivity improvements had helped to ease margin pressure in some cases. A45 After remaining broadly stable since the beginning of the year, the Agents suggested that skill shortages had intensified recently. There had been evidence that shortages had spread out from the southern regions to many other areas of the country. In addition, while in earlier periods the shortages had been limited to specific professional skills, there had been signs that shortages of semi-skilled and unskilled workers (eg cleaning staff) had also increased.

VII

Market intelligence

A46 Since the October MPC meeting, interest rates implied by short sterling futures and two-week gilt forward curves had fallen by 20 basis points. Although the degree of uncertainty about the level of future short-term interest rates implied by options remained at low levels, the expected skew had become increasingly negative and was now at a level not seen during the past four years. Market contacts had suggested that some participants were beginning to believe that rates had peaked. Such a view had been reinforced by the most recent Reuters poll of private sector economists, in which none had a central expectation of a rise in official interest rates at the November MPC meeting. A47 Although the sterling trade-weighted exchange rate had ended the month a little lower than at the time of the last MPC meeting, during the period it had averaged around 110, above the August Inflation Report forecast of 106. Some market participants had suggested that, earlier in the month, sterling had benefited from some `safe haven' flows during the month, when uncertainty about the situation in the Middle East was at its height. Implied correlations derived from one-month foreign exchange options showed that the market increasingly expected sterling to move together with the euro against the dollar. That said, the implied correlation between sterling and the dollar had remained high. A48 During the month, the euro had reached record lows against both the dollar and yen, before recovering following the release of US GDP for Q3. These exchange rate movements were difficult to explain solely by reference to changes in interest rates. The ECB had bought euros on both 3 and 6 November. Expected volatility, derived from one-month foreign exchange options, had remained close to historical highs for the euro-dollar exchange rate, while one-month risk reversals had recently shown a small premium for euro calls over euro puts (compared to a large premium for puts previously), which