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mpc: 23 Against that background, and in the light of the MPC's new forecast for GDP growth and CPI inflation, members of the Committee identified a number of arguments in favour of increasing the repo rate this month. Members attached different weights to these arguments but, taken together, found them to be persuasive. First, the forecast suggested that, on the central projection for CPI inflation, a small increase in the repo rate was necessary to bring inflation back to the 2% target by the two-year horizon. The projected acceleration of activity in the first quarter, consistent with the latest survey evidence, meant that the margin of spare capacity in the economy was likely to be eroded quickly. Also, the risks around the GDP projection were now balanced rather than slightly to the downside. It would be appropriate, in the light of prospective demand growth, to withdraw some of the stimulus that the monetary policy stance was currently giving the economy. This was broadly consistent with the implication of November's forecast, that interest rates were likely to need to rise gradually to keep inflation close to target in the medium term. Second, a decision to maintain the repo rate at this meeting, when an increase in the rate was widely expected by financial market participants, might lead to a fall in the sterling exchange rate, thus removing a key factor offsetting the increased inflationary pressure from prospective domestic demand growth. Third, in the view of some members, it could be argued that it was appropriate to look through the first-round impact of the rise in sterling's exchange rate on prices, treating it as a `one-off' downward shock to the price level which should be disregarded in setting interest rates. It should be treated as an offset to domestic inflationary pressure only if it affected subsequent wage and price setting behaviour. In any case, the rise in sterling's exchange rate might turn out to be temporary. Committee members also noted that a 25 basis point increase in the repo rate now would be consistent with a cautious approach to adjusting rates, given the current uncertainty about the impact of rate rises on household spending against a background of unusually high ratios of debt to income.