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mpc: 10

The immediate policy decision

37 The Committee agreed that the world economy was probably slowing rather faster than expected, but that news on the UK economy was more mixed, with household consumption still buoyant but investment and government consumption growing more slowly. The Committee discussed the implications of these developments for its immediate policy decision. 38 On one view, the repo rate should be maintained at 6% this month. The slowdown in the world economy, after a period of robust growth, would tend to restrain net trade, and hence UK activity. This might reduce inflationary pressures from overseas, particularly if coupled with falling oil prices. However, the overall impact would depend on how sterling's effective exchange rate reacted to the new pattern of relative growth rates between the United States, the euro area and the United Kingdom; sterling was already 2% below the path assumed in the November Inflation Report central projection. Domestically, there was little sign of a slowdown in consumption, which continued to grow at 4% a year. Household borrowing continued apace, supported by high levels of house prices; indeed there were signs that house price inflation might again be picking up. Survey data were mixed, but did not point to a sharp slowdown in spending, and downward pressures on retail prices might be diminishing. For some members, the consumption-related indicators suggested not only that GDP growth would remain more unbalanced than was desirable, but also that inflationary pressures might strengthen. This represented an upside risk to the November forecast, and supported a case for not ruling out the need for some upward adjustment in the repo rate, particularly as recent movements in the exchange rate and market interest rates had already resulted in some easing of monetary conditions. But with weaker world activity, RPIX inflation still below target and steady earnings growth there were still reasons to wait and see. On balance, the repo rate should therefore remain at 6% this month. Other members, while agreeing that the repo rate should remain unchanged, saw the risks as more evenly balanced. While consumption remained buoyant, employment growth was moderating, with unemployment marginally higher, and real income growth might be slowing; pay settlements in the new year would be an important indicator of how far tightness in the labour market would translate into higher nominal pay awards. Growth in investment was sluggish (though its level remained high), there was uncertainty about how fast public spending would increase, and there was a risk that inventories could fall back as the economy slowed. For some of these members the uncertainties surrounding the outlook had increased further