. a more disorderly transition, or a materially different end state from our assumption, would have implications for monetary policy. to understand the mpc ’ s potential response, businesses, households and market participants can draw on the committee ’ s track record of managing the trade - off that emerged after the referendum, since exactly the same framework would apply. as then, the policy response would reflect the balance of the effects of a sharper brexit on demand, supply and the exchange rate. given the exceptional circumstances, the committee would have to decide whether to extend the period over which inflation is returned to target in order to provide support to jobs and activity. although the exact policy response cannot be predicted in advance, observers know from our track record that, in exceptional circumstances, we are both willing to tolerate some deviation of inflation from target for a limited period of time and that there are limits to that tolerance. conclusion in recent years, the uk has faced a series of supply shocks and regime shifts that have created a series of difficult trade - offs for monetary policy. brexit is the most recent and potentially the most important of these. it will soon be entering a critical phase. the paths that the economy, and monetary policy, could take from here are connected by the expectations of households, businesses and financial markets. since the referendum was called, these have reacted at different speeds and to varying degrees to the prospects for the uk ’ s departure from the eu. financial markets, particularly sterling, moved quickly and sharply. bank analysis suggests that brexit remains the most important driver of short term market interest rates since then ( chart 12 ). see the written statement to parliament made by the chancellor on 20 december 2017, available at www. parliament. uk / business / publications / written - questions - answers - statements / written - statement / commons / 2017 - 12 - 20 / hcws382 /. all speeches are available online at www. bankofengland. co. uk / speeches chart 12 : brexit news has been the main driver of uk interest rates decomposition of the variance of uk 3 - year interest rates since november 2015 per cent other brexit euo - area data us data uk data euro - area monetary policy us monetary policy uk monetary policy sources : bloomberg finance l. p. and bank calculations. notes : this decomposition is based on changes in uk 3 - year interest rates in 30 minute windows around data releases and monetary policy announcements in the uk, us and

“ divine coincidence ”. things are different when shocks drive inflation up or down independently of demand. exogenous changes in firms ’ pricing power are one example – so - called cost - push shocks. shocks to the exchange rate, the economy ’ s supply capacity, or commodity prices also have this flavour. because monetary policy ’ s influence on inflation is predominantly an indirect one, via demand, in such circumstances inflation can only be controlled by delivering an opposing movement in aggregate spending. if something pushes up on inflation directly, monetary policy can only bring inflation back down by causing a reduction in spending via higher interest rates. the speed with which this adjustment is delivered is determined by the monetary policy maker guided by their remit. such circumstances have characterised the period in the uk since the global financial crisis ( chart a1 ), which entailed a large adjustment to the supply side of the economy, meaning a lower exchange rate, lower growth, and higher inflation. in contrast, the us and the euro area have seldom faced a trade - off between output and inflation stabilisation, even since the global financial crisis ( charts a2 and a3 ). all speeches are available online at www. bankofengland. co. uk / speeches chart a : divine coincidence has continued to reign in the euro area and us post - crisis but not the uk a1 ) uk great moderation inflation ( % ) financial crisis and after inflationary, with trade - off inflationary, no trade - off - 6 - 5 - 4 - 3 - 2 - 1 excess demand ( % ) disinflationary, no trade - off disinflationary, with trade - off - 2 sources : ons and bank calculations. a2 ) us great moderation financial crisis and after inflation ( % ) - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 excess demand ( % ) - 1 - 2 sources : bureau of economic analysis, cbo and bank calculations. notes : the measure of inflation is the four - quarter change in the personal consumption expenditures ( pce ) deflator. the output gap is calculated using the cbo estimate of potential output. all speeches are available online at www. bankofengland. co. uk / speeches a3 ) euro - area inflation ( % ) great moderation financial crisis and after - 4 - 3 - 2 - 1 excess demand ( % ) - 1 sources : eurostat, imf and bank calculations. notes : the measure of