"The biggest risk I see to that outlook for demand is around the resolution of the current uncertainty about our eventual trading arrangements and the path that will be followed to reach them."
David Ramsden, who joined the Bank of England as Deputy Governor for Markets and Banking in September, says the uncertainty surrounding Brexit formed part of his reason for voting to maintain Bank Rate at 0.25% in the Monetary Policy Committee's latest meeting.
Earlier this month, the Committee vote by a majority of 7-2 to raise interest rates.
However in a speech given yesterday at King’s College London, Ramsden said he had a "different assessment of the economy", comparing how things might have turned out in the absence of Brexit, for which he used the MPC’s May 2016 forecast as a proxy.
He noted that GDP growth in the year to Q2 2017 was 0.8pp weaker than the MPC’s May 2016 forecast, within which business investment growth was a full 5.2pp lower, while real wage growth was 2.6pp weaker.
GDP growth has now slowed from average quarterly rates of 0.7% in 2014 and 2015 to 0.4% more recently.
He also cited slowing demand, caused primarily by a slowdown in consumption growth as sterling fell by 18% from its pre-referendum peak.
The MPC’s forecast for GDP growth remains at 0.4% per quarter over its three-year forecast horizon, which will leave the economy about 2% smaller by 2020 than the May 2016 MPC forecast would have implied.
Ramsden said: "The biggest risk I see to that outlook for demand is around the resolution of the current uncertainty about our eventual trading arrangements and the path that will be followed to reach them. Were that uncertainty to be lifted, I can see a case for why UK whole economy demand could grow more strongly."
He continued that increased flexibility amongst workers means there is more room for the economy to grow without generating above-target inflation in the medium term. Ramsden added that for him to vote for a rate rise, he would want to see signs that above target inflation is "feeding through to ‘second round’ effects in domestic costs", which so far "doesn’t seem to be the case".