The Bank of England could implement deeper interest rate cuts if signs of a cooling labour market persist, according to Governor Andrew Bailey.
In an interview with The Times, Mr. Bailey reiterated his belief that interest rates are on a downward trajectory. “I really do believe the path is downward,” he stated, although he cautioned that any reduction would remain “gradual and careful.”
Interest rates currently sit at 4.25% and are next due for review on August 7. They influence borrowing and savings costs for millions of UK households and businesses.
Bailey pointed to emerging signs that companies are reacting to economic pressures by cutting employee hours and slowing wage growth. These trends, he noted, align with the Bank’s expectations of easing inflation. He also linked the labour market adjustments to Chancellor Rachel Reeves’ decision in April to raise employers’ National Insurance contributions from 13.8% to 15%, a move expected to generate £25 billion annually.
Though inflation remains above the Bank’s 2% target, Bailey argued that the current economic “slack,” with growth lagging behind potential, is helping to contain price pressures.
Interest rates were left unchanged at the Bank’s June meeting, following two earlier cuts this year. However, Bailey hinted at flexibility if the economic data warrants it.
“I know some people ask, ‘Why cut rates while inflation is still high?’ But we’re seeing signs that the economy is cooling, and that supports our approach,” he said.
The UK economy shrank by 0.1% in May, following a similar contraction in April. The Office for National Statistics attributed the decline to weak manufacturing and retail performance.
The continued economic sluggishness adds pressure on the new government, which has made reviving growth a central pledge.
