mpc.theyserveforyou.com

mpc: 8 29 As already described, there was a range of preferred assumptions for the path of the nominal exchange rate and for price-cost margins; these were presented in Table 6.B on page 57 of the February Inflation Report. Different members preferred different combinations of these assumptions, either raising or lowering the inflation projection at the two-year horizon by up to half a percentage point.

Other considerations: implications of the exchange rate and sectoral imbalances

30 Against the background of its latest projections and its analysis of the recent data, the Committee discussed a range of issues before turning to its immediate policy decision. In particular, a number of Committee members were very concerned about the further rise in the exchange rate that had occurred over the past few months; and about the associated imbalances in the economy. 31 The prospects for inflation depended heavily on the path of the exchange rate, which was highly uncertain. If sterling were to depreciate in line with interest rate differentials (or more) then, other things being equal, inflation would most likely be above the 2½% target by the forecast horizon. If, on the other hand, sterling's current strength persisted, inflation would most likely be below target throughout the forecast period. 32 The Committee discussed the implications for monetary policy of domestic sectoral imbalances associated with the continuing strength of sterling. 33 On one view, prospective sectoral imbalances should not of themselves affect the Committee's interest rate decision given its remit. Moreover, imbalances had, if anything, narrowed in recent months. The difference between recent annual rates of growth for services and manufacturing had declined. Regional differences had also narrowed, with for example the balance of new orders recorded in the January CBI Quarterly Trends survey rising in ten out of eleven regions. Moreover, a marked dispersion of growth rates amongst firms within particular sectors was to be expected in a period of technological and structural change; in that sense the imbalances between old and new industries were a symptom of factors that would otherwise be regarded as desirable. 34 On another view, if the exchange rate persisted at its current level, the imbalances in the economy would probably get worse and that was unwelcome. It was already likely that there had been failures amongst businesses which would have been able to survive at a lower ­ and, on the view of some members, more sustainable ­ real exchange rate. It was noted that one recent IMF study had estimated that sterling was overvalued by more than 15%, a bigger misalignment than the study