Mark Carney has claimed that progress in Brexit negotiations towards a "deep and special" relationship with the EU could unleash a "boom in investment" as cautious bosses dust off growth plans that have been on hold.
Consumer spending could also rocket, the Governor of the Bank of England said, in a significant boost for the economy’s prospects.
Earlier this week he said Brexit had hit economic growth by 2pc and reduced household incomes by £900 relative to the outcome of a Remain vote in the referendum.
But in a speech to economists in London he made clear that some of this could prove temporary if the Government makes progress in talks with Brussels.
“If there is progress towards the new, deep and special partnership the Government is seeking, a boom in investment and potentially consumption could be unlocked, boosting output,” the Governor told the Society of Professional Economists.
This could push economic growth up to more than 2pc per year in 2019, 2020 and 2021, beating the current forecasts for GDP to expand by around 1.7pc per year.
However it would also lead to stronger inflation, encouraging the Bank to raise interest rates “a little more, a little sooner” than currently expected.
“If business investment growth were to recover much more strongly than currently projected – perhaps because of improved sentiment about progress on Brexit – then demand would grow well in excess of supply, pushing inflation above target throughout the forecast in the absence of tighter policy,” Mr Carney said.
This is not certain to happen, however.
Household incomes are rising faster than prices, which the Bank anticipates will boost the economy as spending increases.
However households reduced their savings and increased borrowing to keep on spending when prices rose faster than wages over much of the past year, so they may instead choose to save some of their extra spending power.
Alternatively, a breakdown in Brexit talks could harm the economy.
Mr Carney stressed that the UK financial system is more than able to cope with any "cliff edge" departure from the EU, and said the Bank of England is ready too.
He hinted that likely actions in such an event could include cutting interest rates, as happened after the referendum.
“A sharper Brexit could put monetary policy on a different path. For example, if the transition were disorderly, or the end state agreement materially worse than the average potential outcome, then the MPC could once again be confronted by a trade-off between the speed with which it returns inflation to target and the support policy provides to jobs and activity,” he said.
“On this path, the MPC can be expected to set policy to manage any trade-off using the framework it applied following the referendum.”