The Committee intends to provide information about its updated view in its August Inflation Report. Guidance, Contingency and Brexit My third example of guidance is associated with another major structural change: Brexit. To put the upcoming regime shift into context, consider what has already transpired merely in anticipation of possible future changes to flow of goods, service, capital and people. On the eve of the referendum, the MPC expected that a vote to leave would prompt the exchange rate to fall sharply, inflation to rise above the 2% target and growth to slow materially. That is exactly what has happened. Sterling fell sharply immediately following the result, and remains some 15% below its late-2015 peak before the referendum was called. Financial markets are valuing today what they expect tomorrow: a relative fall in real incomes as the UK moves toward its new trading arrangements. Inflation rose well above the 2% target, peaking at 3.1% late last year, an overshoot entirely due to the referendum-induced fall in the exchange rate. And UK growth has dropped from the fastest to the slowest in the G7. The economy has significantly underperformed the MPC’s projections ahead of the referendum, which were conditioned on a vote to 11  remain. That deceleration has occurred despite support from a much stronger-than-anticipated euro-area  and global growth and much more supportive domestic financial conditions, with the latter importantly influenced by the timely, comprehensive package of easing measures introduced by the Bank’s policy committees after the vote.
Monetary policy can, however, support the economy during the adjustment process. During these exceptional circumstances, the MPC is required by its remit to balance the trade-off between the speed at which inflation is returned to target and the support that monetary policy provides to jobs and activity. 14  The MPC set out our framework for managing this trade-off including guidance on its tolerance for the overshoot of inflation of target under exceptional circumstances. Chart 6 illustrates the MPC’s framework for setting policy to manage this trade-off. The red lines represent the potential trade-offs that the Committee could strike: mapping the size of the inflation overshoot that it could be prepared to tolerate for a given amount of spare capacity, and vice versa. The flatter the line, the less weight the Committee places on output stabilisation and the more it is willing to tolerate large output gaps in order to eliminate small overshoots in inflation. Chart 6 also demonstrates how the expected trade-off has evolved in successive MPC forecasts since the referendum. It shows the MPC's central projections at Year 2 for CPI inflation on the vertical axis against those for spare capacity (the opposite of excess demand) on the horizontal axis from successive Inflation Reports since August 2016. The projections are conditioned on the market yield curves prevailing at the time the forecasts were made.