The Bank of England is prepared to make larger interest rate cuts if the job market shows signs of slowing down, its governor has said.
In an interview with the Times, Andrew Bailey said “I really do believe the path is downward” on interest rates.
Interest rates currently stand at 4.25% and will be reviewed at the Bank’s next meeting on 7 August.
They affect mortgage, credit card and savings rates for millions of people.
In the Times interview, Bailey said there were consistent signs that businesses are “adjusting employment and hours” and are giving smaller pay rises following UK Chancellor Rachel Reeve’s move to increase employers’ national insurance contributions from April.
Reeves raised national insurance rates for employers from 13.8% to 15% in April this year, in a move the government estimated would generate £25bn a year.
Bailey said the UK’s economy was growing behind its potential, opening up “slack” that would help to bring down inflation.
“I think the path [for interest rates] is down. I really do believe the path is downward,” the governor said.
“But we continue to use the words ‘gradual and careful’ because… some people say to me ‘why are you cutting when inflation’s above target?”‘
Interest rates were held at 4.25% during the Bank’s last meeting in June, following two cuts earlier in the year.
During that meeting, Bailey also said interest rates would take a “gradual downward path”.
The UK economy contracted by 0.1% in May, after also shrinking in April, according to the Office for National Statistics.
The unexpected dip was mainly driven by a drop in manufacturing, while retail sales were also “very weak”, said the Office.
The UK’s performance adds pressure on the government, which has made boosting economic growth a key priority.
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