But the balance of evidence so far seems to me to suggest that MPC’s May forecast of the growth path remains broadly intact. And, crucially, that the domestic economy is likely to generate the relatively gentle inflation pressure necessary to meet the target over the next two years, as the current external inflationary pressures from sterling’s depreciation wane. The May forecast was of course conditioned on a market yield curve that implied a limited and gradual tightening of 75 basis points over the forecast period. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  So has the need for a stodgier approach now gone? It seems to me that while diminished, there remains considerable uncertainty about the supply side. Domestic inflation pressures, while strengthening a little are not yet established at levels consistent with inflation at target (Chart 8). Pay growth has established itself in the 2.5-3% range. But the latest readings do not signal strongly that pay growth will make the next step to establish itself firmly in 3% territory in line with the May forecast. 12  We may still be underestimating supply in the labour market. 13  In short we are still learning about the relationships between key economic variables in the post crisis economy and are still a long way off the old rules of thumb. This for me still implies an approach with a little more resistance in our reaction to developments. Such an approach is not, however, a stopped approach.
It has also generated export growth that has help support the economy. More recently, there are signs that Brexit uncertainty is holding back investment. These impacts are incorporated into the MPC’s assessment of policy and forecast of the economy. But it is much harder, and in my view it would be mistaken, to set policy in anticipation of any particular Brexit outcome. There is a very wide range of possible outcomes and paths to those outcomes. And it is not at all clear how the evolution of demand, supply and the exchange rate would respond in different circumstances – which could mean very different implications for monetary policy. Over time, Brexit is likely to affect the supply side of the economy which has evolved and specialised over the last 45 years in the context of our EU membership. If the Brexit outcome generates the types of uncertainty about the economic model that I have been discussing, that will need to be factored into the policy approach. But for the present, my view is that the best course for the MPC on Brexit is to react to the economy as we 18  now see it conditioning our forecasts on neutral assumptions about Brexit outcomes. At the same time, we  should stand ready to respond, quickly and vigorously to any sharp impacts on supply, demand and the exchange rate that might emerge – as the Committee did immediately following the referendum.