The Bank of England could take interest rates to zero and unlock another £280bn of quantitative easing if the economy slows in the wake of the Brexit vote.
In fresh analysis by Michael Saunders, the newest member of the Bank's monetary policy committee (MPC), he outlines how the Bank would respond should the economy perform significantly better, or worse, than current estimates suggest.
At the moment, the Bank is forecasting growth to have come in at 0.3 per cent in the third quarter, and for the UK to expand by just 0.8 per cent next year.
However, should a Brexit recession materialise, and the UK economy end up two per cent smaller than the Bank is currently expecting, the most appropriate path for monetary policy, Saunders said, would be to slash interest rates to zero and pump £280bn of fresh cash into the economy. Such a move would take the Bank's balance sheet above £700bn.
Conversely, should the UK defy expectations and grow faster than the Bank expects, Threadneedle Street will be forced to ramp up interest rates rapidly to keep the economy in check. Saunders estimated interest rates would need to start rising from their all-time low of 0.25 per cent early next year, climbing to 1.5 per cent in 2018.
Despite voting unanimously to cut rates in August, MPC members have been divided on the future outlook for the UK and monetary policy. Governor Mark Carney's key ally and deputy governor Minouche Shafik said rates would still need to be cut despite recent good economic news. Meanwhile, external MPC member Kristin Forbes believes it may be too soon to act again later this year.
Outlining his own take on the state of the economy, Saunders said: "Unless Brexit-related uncertainties rise and/or global conditions disappoint markedly, I suspect that the UK economy will not be too bad in the year ahead, with growth in 2017 more likely to be clearly above one per cent, rather than - as the consensus expects - below one per cent.