mpc.theyserveforyou.com

mpc: 10 have made any significant borrowing in the past six months. But of those companies that hadborrowed, financing new domestic investment had been by far the strongest motive.

VII

Market intelligence

A51 Expectations of UK interest rates implied by short sterling futures had fallen since the MPC meeting, by around 30 basis points for contracts maturing in 2001 and 2002. Expectationsof interest rates in the United States and, to a lesser extent, the euro area had also fallen,notwithstanding expectations of increases in official rates in March by the FOMC and ECB. Bycontrast, there had been little expectation in the market that official rates in the United Kingdomwould rise in March. Market participants had commented on the disinflationary effects of a highexchange rate and the possibility that the earnings and retail sales data had been distorted by end-year effects. A52 Sterling's effective exchange rate had appreciated slightly since the previous MPC meeting, with a 1.6% appreciation against the euro (which has a 65% weight in sterling'seffective exchange rate) counterbalanced by a depreciation against the dollar. In seeking toexplain the continued strength of sterling, market participants had emphasised the impact of thegeneral weakness of the euro. Against the dollar, sterling had been at the bottom of its tradingrange over the last three years. Risk reversals traded in the foreign exchange options market hadsuggested that market participants had been paying a premium to protect themselves against therisk of sterling depreciating against the dollar. This was not the case against the euro. Data onmarket positioning had suggested that most participants' holdings of sterling were close to theirbenchmarks. Chart-based traders had continued to expect the euro to depreciate against sterling.