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mpc: 9 services. Consistent with the latest CIPS construction survey, construction orders had continued to grow, but had not accelerated. A42 Agents had reported strong retail sales growth over Christmas and the New Year, particularly in household goods. The new car market remained subdued, but there were reports of a slight recovery in the used car market. External demand had continued to pick up. While services investment remained strong, manufacturers were reported to be more hesitant. A43 Manufacturers' input prices had continued to rise. There had been continued downward pressure on manufacturers' output prices, squeezing margins further. In the service sector, input price increases and higher wage costs had remained easier to pass through to consumers. Retail prices were reported to be flat or falling. The labour market had remained tight, with growing shortages of both skilled and unskilled staff leading to sizeable pay pressure in some areas, notably in information technology and accountancy. There had been steady growth in employment in services.

VII

Market intelligence

A44 The sterling effective exchange rate index had continued to rise over most of the month, reaching 110.3 on 1 February, its highest level since December 1985. However, the index had fallen sharply after 1 February. It ended the period at 108.6, 0.7% above its level at the time of the January MPC meeting. A45 The rise in sterling's trade-weighted index during January had largely reflected the euro's depreciation against all the major currencies. News about relative interest rate differentials had been unable to provide much explanation for exchange rate movements during the month. A number of commentators had concluded that the euro had been overvalued in 1998 and 1999 and had illustrated this point with reference to the euro area's negative `basic balance', defined as the sum of the current account balance and net long-term capital flows (direct and portfolio investments). For these commentators, a negative `basic balance' was consistent with the view that structural factors had made euro-denominated assets unattractive for investors. A second explanation put forward by some commentators for sterling's appreciation had related to mergers and acquisitions involving UK companies--both actual and rumoured. A46 Market expectations of official UK interest rates implied by short sterling futures contracts for 2000 and 2001 had fallen by 10-25 basis points during the month. This had largely been attributed to a