She said the bank’s November forecast for a recovery in demand assumed that the UK moved to a free trade agreement with the EU this year and that the recent uncertainty unwound quickly.
“The risks to these assumptions are largely to the downside,” Ms Tenreyro said in a speech at the Resolution Foundation think tank in London. “If uncertainty around the future trade arrangement or subdued global growth continued to weigh on UK demand then my inclination is to respond with a vote for a cut in rates in the near term.”
Her comments came a day after Mark Carney, the bank’s governor, said that evidence of persistent weakness in activity would favour a “relatively prompt response”, and the pound dipped further against the US dollar.
However, she indicated that a vote for a cut might not come for a number of months. “A key input in the decision is how uncertainty unwinds going forward, and how that impacts on demand,” Ms Tenreyro said in a question and answer session.
“We will be watching very closely how firms and households respond to Brexit developments. We are talking about the coming months, or I am talking about the coming months, on the possibility of further stimulus.”
The next decision by the Monetary Policy Committee (MPC) is on 30 January, which means that the “flash” estimates of economic activity on 24 January by the Chartered Institute of Procurement and Supply will be closely watched.
In November and December, the MPC voted by seven votes to two to keep the bank rate on hold at 0.75 per cent, meaning that three members would have to change sides to secure a rate cut.
Traders repriced rate-cut probabilities following Mr Carney’s speech with the market, currently pricing a 10 per cent probability of a cut this month, 20 per cent in March and close to 40 per cent in May, according to Deutsche Bank. “The BoE is in play and will be data dependent,” said strategist Francis Yared.
Analysts think that, on balance, the bank will wait to see the spending plans in chancellor Sajid Javid’s Budget in March and what stimulus to the economy that will provide.
Kallum Pickering, UK economist at German bank Berenberg, said Mr Javid has already set out plans for the fastest growth in day-to-day government spending in 15 years in the September spending round, and was likely to follow up with public investment plans.
He said a recovery in global demand should lift output in export-oriented industries, while a reduction in domestic political uncertainty over Brexit should lift household confidence and underpin a pick-up in real consumption growth.
Berenberg believes these factors will underpin an economic rebound, with real GDP growth accelerating from 1.3 per cent in 2019 to 1.8 per cent this year and 2.1 per cent in 2021.
“We expect [the bank] to tone down its dovishness quickly once it sees clear evidence that the economy is improving on its own,” Mr Pickering said.