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Possible tactical considerations

23 The Committee noted that there was a widespread expectation in financial markets that the repo rate would be reduced by 0.25% at this meeting: the 0.25% reduction agreed at the special meeting on 18 September had generated expectations of a further reduction. The Committee recognised that confidence considerations were of particular importance in current circumstances.

The immediate policy decision

24 The economic news on the month suggested that, prior to the terrorist attacks, the outlook for the world economy had weakened by more than expected, particularly in the euro area. In the United Kingdom, the revisions to National Accounts data suggested that imbalances in the economy were more pronounced than previously thought. The level of final domestic demand, notably of consumption, had been revised up since 1998, in particular for the first half of 2001. But the recent decline in business confidence suggested that the prospective slowdown might be more rapid than previously envisaged. The terrorist attacks had had an immediate adverse impact on confidence at home and abroad, but consumer spending in the United Kingdom appeared relatively unaffected so far. There had also been a mixed response in financial markets. The foreign exchange market had reacted less than might have been expected; yield curves had steepened; associated with an increase in uncertainty, there was some evidence of a rise in risk premia which could dampen activity, for example by reducing equity prices; and the fall in the oil price would ease inflation pressures in the near-term. The medium-term implications were unclear and might not entail a lasting effect on growth or inflation. Finally, monetary policy abroad had been eased. Against this background, the key issues were whether interest rates were now at a level which would maintain domestic demand growth at a rate sufficient to keep inflation on track to meet the target in the medium-term; and whether there was in addition a case for reducing rates further to sustain confidence, until the likely economic consequences of the terrorist attacks became clearer. 25 Given the 0.25% repo rate reduction which had already been made at the special meeting on 18 September, some arguments were identified against a further reduction. The revisions to the National Accounts data suggested that domestic demand had been stronger than previously thought in the first half of the year. A further repo rate reduction might worsen the current imbalances in the economy, to the extent that it could further stimulate the housing market and the growth of consumer