Let me explain why in more detail, and then conclude with where that leaves my policy thinking. The Brexit vote  Turning first to Brexit. The vote to leave the EU leaves the UK in a position which is not just unusual but unique. As my colleague the Governor said recently, the Brexit negotiations are the biggest challenge as well as the biggest opportunity facing the country at this moment. And the outcome of those negotiations remains the most significant influence on the economic outlook, as well as the greatest source of uncertainty about the future. As a member of the MPC, my task in the face of this uncertainty is to balance any trade-off between the speed at which inflation returns sustainably to target and supporting employment and activity, in line with our 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  remit from the Government, as the UK economy transitions to whatever end state results from those negotiations. What does that mean in practice? In the MPC’s assessment, consistently held since before the referendum, Brexit is affecting the UK economy via three main channels – that is, through its effects on supply, demand and the exchange rate. On the supply side we expect Brexit to have both a long and a short run effect on productivity. 5  The long run effect comes about through the effects on the UK’s openness. We know that on average being more open to trade makes an economy more productive.
Monetary policy can reduce inflation, but only at the cost of reducing output and increasing unemployment. If inflation is above target and output is below potential (or vice versa), there is a fundamental trade-off between achieving the two objectives. Since 2013 the MPC’s remit has required us to manage significant trade-offs when exceptional circumstances cause them to arise. And that has been the basis for the Committee’s assessment of the UK situation since the referendum. 12  To explain how our position on this has evolved, let me turn to the second unusual aspect of the economy that I want to focus on this afternoon: the UK labour market. 11  For more details see Box 5, “How has the economy evolved relative to the February 2017 Report”, in the Prospects for Inflation section of the May 2018 Inflation Report. 12 For a detailed explanation see: Carney, M (2017), “Lambda”, speech at the London School of Economics, 16 January 2017. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  The labour market I said at the start of this speech that wage growth has been surprisingly weak. That wasn’t a figure of speech. This chart (Chart 8) shows the MPC’s wage growth forecasts from the past few years against the actual data. As you can see, the MPC have been consistently surprised by the continued weakness of wage growth.