Bank of England Governor Andrew Bailey has firmly reiterated his belief that the path for interest rates is “downward,” despite ongoing criticism regarding cuts while inflation remains above target. His latest remarks, however, also hinted at the possibility of larger reductions if the UK job market slows too quickly, sending the pound to a three-week low.
Bailey addressed the skepticism surrounding rate cuts when inflation is still at 3.4% (above the 2% target), emphasizing the Bank’s commitment to a “gradual and careful” approach. Yet, he made it clear that a more rapid “slack opening up” in the economy would lead to a different, potentially more aggressive, conclusion regarding the pace and magnitude of future rate adjustments.
The central bank’s existing policy has already seen four quarter-point cuts over the last year, bringing the bank rate to 4.25%. The next decision is scheduled for August 7, and money markets are now pricing in an 85% chance of another cut, a notable increase from the previous week. This heightened expectation reflects investor confidence in Bailey’s stated trajectory for interest rates.
The economic context for these decisions includes a weakening economy, with GDP shrinking for two consecutive months, and a significant slowdown in business hiring, as reported by KPMG. These indicators provide the Bank of England with the rationale for considering further easing, aiming to stimulate economic activity and counteract the pressures of higher taxes on employers, which Bailey suggests are contributing to the emerging “slack.”
