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mpc: 5 15 In the foreign exchange markets, sterling's effective exchange rate had weakened by about 2% as the euro strengthened against the dollar, but this had been reversed in the days leading up to the Committee's meeting. 16 Though the market still priced in a further small cut in domestic interest rates over the coming months, the market expectation was that it would not be made at this month's meeting.

The labour market

17 Though employment as measured by the Labour Force Survey (LFS) was a little lower in the second quarter than in the three months to May, the more reliable comparison was with the first quarter and on that basis employment had continued to grow steadily. The CIPS surveys' overall employment index (covering the private sector) had been flat at around its no change level for several months and the Recruitment and Employment Confederation data suggested a decline in the demand for permanent staff from agencies, so there were some indications that the market might now be close to a turning point. But this was still not evident in the official data: unemployment continued to fall and it was notable that both inflows to and outflows from the claimant count were still falling steadily. Inflows into unemployment tended to be counter-cyclical, so the absence of any marked pick-up in inflows - despite the many announcements of layoffs and redundancies - was notable. This might, however, be explained partly by delays between announcement of job cuts and their implementation. It was also somewhat puzzling, given the divergent employment trends in the manufacturing and services sectors (which would tend to increase market turnover), that outflows were falling too. 18 It was curious that employment should still be growing despite several quarters of below-trend output growth. Productivity was as a result plainly growing more slowly than its trend. To some extent this too might be a reflection of the imbalances in the economy, with an increasing proportion of output now accounted for by the services sector in which measured productivity tended to grow more slowly than in manufacturing. But this could not wholly explain the puzzle, as manufacturing productivity growth was itself slowing. 19 Annual earnings growth in the second quarter had been a little stronger than had been projected in the August Inflation Report, with regular pay now growing at over 5% in the private sector and nearly 6% in the public sector. The continued strength of public sector earnings growth suggested that its recent sharp increase did not simply reflect the transitory effects of the introduction of new pay