Bank of England Governor Andrew Bailey has suggested that interest rates are still likely to follow a downward trend, though any reductions will be approached with caution. Speaking to the House of Lords Economic Affairs Committee, Bailey noted that the UK labour market is showing signs of softening.
“The path of interest rates is still downwards,” he said, “but it is going to be very gradual and very careful because we’ve got this inflation bump, and we need to see that ease.”
Inflation in the UK eased to 3.4% in May, remaining above the Bank’s target of 2%. In response, the Bank of England held interest rates steady at 4.25% during its most recent meeting. However, markets are now widely expecting a rate cut in August.
Bailey referred to the current rate level as “restrictive,” though he declined to offer clear guidance ahead of the next policy decision. “In these circumstances, we are particularly careful about what we say on that front because the world is just so uncertain,” he explained.
Despite this caution, Bailey acknowledged there are early indicators supporting a potential loosening of monetary policy. “We are starting to see softening of the labour market,” he said. While wage growth remains above what would align with the Bank’s inflation target, he observed that pay increases are beginning to moderate.
At a separate event earlier in the day, Deputy Governor Dave Ramsden offered a more forthright assessment, stating that clear signs of a weakening labour market are emerging. Ramsden also expressed concern that inflation could fall below the Bank’s current forecasts.
The global economic environment is adding further complexity to the Bank’s outlook. Bailey emphasised that monetary policy decisions must take account of wider geopolitical developments. In particular, he cited ongoing trade tensions involving the United States as a source of considerable uncertainty.
“We have to return, at every meeting, to what’s happening globally,” Bailey said. He highlighted former US President Donald Trump’s trade policies as a key variable, warning that the consequences of such actions remain unclear. “It is very unpredictable where this is all going to end up,” he remarked, referencing the conclusion of Trump’s 90-day trade negotiation period. “We have one agreement so far, which is with the UK. That obviously isn’t implemented yet… So quite where this is going to go to, I’m afraid we don’t know at this stage.”
Bailey also warned that rising trade tensions could dampen global economic performance. “Fragmenting the world economy is bad for activity and bad for growth in the world economy,” he said, noting that reduced trade flows could hinder innovation. He added that the inflationary impact of tariffs is uncertain—they might push prices up due to supply chain disruptions, or conversely, they might reduce inflation if redirected exports boost supply in the UK market.
Megan Greene, an external member of the Bank of England’s Monetary Policy Committee (MPC), has acknowledged that the Bank is currently in a difficult position, as it attempts to strike a balance between the risks to inflation and economic growth. Speaking at the National Institute of Economic and Social Research, Greene described the situation as an “uncomfortable place”.
She explained that despite some signs of progress, the UK economy continues to face underlying weakness. “The main messages for me remain the same,” Greene said. “Underlying activity is weak, the labour market has loosened further, and the disinflationary process is continuing—though we appear to be settling at a higher-than-ideal inflation level of around 3.5% for the second half of this year.”
Greene also pointed to additional risks stemming from global geopolitical tensions and fluctuations in energy prices, especially in relation to instability in the Middle East. These external pressures add further complexity to the Bank’s decision-making process.
Meanwhile, Dave Ramsden, Deputy Governor of the Bank of England, reiterated the case for a cautious reduction in interest rates. He was one of three MPC members who voted for a rate cut during the latest meeting, where the decision ultimately split 6–3 in favour of holding rates.
Speaking at the Barclays-CEPR Monetary Policy Forum, Ramsden described his vote to cut rates as “a finely balanced judgement”. However, he said his decision was “robust for two main reasons.”
“Firstly,” he noted, “even at a 4% rate, monetary policy would still be clearly in restrictive territory. Should inflationary pressures re-emerge in the medium term, we could maintain higher rates for longer if necessary.”
“Secondly,” he added, “given the uncertain environment we’re currently in, it’s crucial for monetary policy to be guided by the economic outlook. It needs to adjust—and be seen to adjust—when new evidence about the outlook comes to light.”
Ramsden emphasised his ongoing commitment to a measured and adaptable policy approach. “I continue to take a watchful and responsive approach to setting policy,” he said. “This aligns with the MPC’s collective stance that policy decisions are not on a fixed course. We will assess how much restraint is needed at each meeting.”
The Bank of England is due to deliver its next decision on interest rates on 7 August.
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