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mpc: 3 change in the Bank's repo rate this month. 8 Sterling's effective exchange rate was about 2% higher than at the time of the Committee's previous meeting, reflecting rises of over 1% against the dollar, 1½% against the euro and 8% against the yen. Renewed speculation regarding a move towards EMU entry might otherwise have weakened sterling, so the rise on the month suggested that it was well-supported at the present level. 9 The annual rate of growth of households' deposits had increased in November to over 9%, and households' borrowing to nearly 11%; both rates were at ten-year highs. Mortgage equity withdrawal had risen from 2.3% of total household post-tax income in the first quarter of 2001 to 4.1% in the third quarter. 10 The rate of increase in house prices had risen in December, and the rates recorded (15½% on the Halifax index and 14% on the Nationwide) for 2001 as a whole were the highest rates in any single year since 1988. The rate of increase was consistent with the growth of households' deposits and borrowing, but the renewed acceleration was surprising. One possible explanation was that some households were induced to increase their borrowing by low current nominal rates of interest ­ the proportionate reduction in mortgage servicing costs associated with the reduction in the repo rate from 6% to 4% had been very large ­ and were ignoring the fact that the real burden of the loan would no longer be eroded to the same extent by inflation as in the past. If that were the case, adjustment to this misperception might take some time. Alternatively, strong demand for housing might reflect the low returns available on other investments, given that equity returns had been negative and retail deposit rates were low.

Demand and Output

11 Anecdotal evidence, supported by reports from the Bank's regional Agents, the CBI Distributive Trades survey and the latest GfK consumer confidence survey, suggested that strong growth in retail sales had been maintained over the Christmas period. Although consumption had itself grown by 4% in real terms over the year to the third quarter, and by 1% in that quarter, the difference between retail sales and consumption growth was at its largest for 20 years. It was possible that consumption of services not captured in the retail sales data, such as travel and tourism, had been adversely affected, first by the foot-and-mouth epidemic and then by fears about the safety of international travel.