Today's announcement reflects the fact that the economy has been growing since the middle of 1998, to the point where, in our judgement, the spare capacity evident over the past two years or so has been almost completely used up.
Inflation presents no immediate threat.
Indeed, recent surprisingly low inflation data raise the possibility that the onset of inflationary pressures may be weaker, or more delayed, than earlier experience would suggest. But the downward pressure on inflation from surplus productive capacity in the economy has now all but gone. Were monetary conditions to remain as stimulatory as in recent months, the risk of inflation becoming a problem would increase, and potentially require more marked increases in the OCR later on. In other words, moderate action now reduces the risk of having to take more vigorous action later. Our current projections suggest that monetary policy will need to restrain demand somewhat over the next two years, although less so than at this stage of previous business cycles.