"The main drivers appear to be the decline in petrol prices since last October, a pickup in net immigration and an expansionary fiscal policy.
“At the same time, headline inflation has reduced as a result of the lower oil prices and the strengthening of the exchange rate in the fourth quarter. Annual CPI inflation fell to 2.6 percent in December and is projected to decrease considerably further through 2007, thus helping to lower inflation expectations. But the medium-term outlook is less rosy, with annual rates of inflation projected to return to the upper part of our target range through 2008 and into 2009.
“While the near-term inflation outlook is relatively benign, we remain concerned about the upside risks to medium-term inflation. In particular, our assumption that the housing market and consumer demand will resume their slowing trend over 2007 and 2008 is looking more uncertain, particularly if further fiscal expansion occurs.
“In the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required.
"The situation will be reassessed in the light of a full review of our economic forecasts at the March Monetary Policy Statement. A return to a moderating trend in housing and domestic demand will be essential if we are to see a reduction in medium-term inflation pressures.”
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