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mpc: 10 37 There was some evidence from the CBI Distributive Trades survey that downward pressures on retail prices had intensified, with the balance in 2000 Q2 at ­6, as against +18 in 1999 Q2. By contrast, surveys of manufacturing and services prices by the British Chambers of Commerce suggested that output price pressures were much stronger in 2000 Q1 than in 1999 Q2. It remained to be seen whether this pressure on margins would be sustained. 38 As a result of higher oil prices and a weaker exchange rate, the Committee agreed that inflation over the rest of this year might move closer to the 2½% target than had seemed likely at the time of the May Inflation Report. If inflation over the medium term were likely to be above its target, rather higher inflation now might mean that the Committee had less time to wait before it needed to raise rates. But it was unclear whether the risks to inflation over the medium term were on the upside, or indeed whether higher-than-expected retail prices in the short term had significant implications for inflation further ahead.

Tactical considerations

39 The Committee noted that there was very little expectation in the market of a change in the repo rate this month, and that neither the FOMC nor the European Central Bank was expected to move rates in the immediate future. Against that background, there was a risk that any change in UK rates would lead to a larger movement in interest rate expectations than would be warranted, with a corresponding effect on the exchange rate. While this might be a reason for leaving rates at 6%, it did not of itself preclude a change in rates this month if there were good reasons to move in terms of the outlook for inflation. As always, if rates were to be changed unexpectedly, it would be necessary to set out clearly the reasons for the Committee's decision. 40 The Committee agreed that it was difficult to calibrate the effects of the recent slowdown in domestic demand on inflation prospects over the medium term. By comparison some felt that the effects of the weaker exchange rate and lower-than-expected average earnings would be easier to calibrate, although even in these cases it would be necessary to re-examine some of the assumptions made about the pass-through into prices over the medium term. The forthcoming forecast round provided an opportunity to assess the relative impacts of these developments in some detail, and the August Inflation Report a means of explaining how this analysis had influenced the views of the Committee.