Bank of England Governor Expects Gradual Rate Cuts Amid Inflation Concerns

Bank of England (BOE) Governor Andrew Bailey has reiterated that interest rates in the UK are expected to move "gradually downwards." This statement comes as the central bank attempts to balance curbing inflation with stimulating economic growth. In an interview, Bailey emphasized that while rates are on a downward trajectory, the decision to cut rates at the next policy meeting will depend on the evolving economic data.

Economists anticipate a 25 basis point rate cut at the BOE’s next meeting in August, which would reduce the benchmark rate from 4.25% to 4%. However, Bailey cautioned that the Monetary Policy Committee must remain vigilant about persistent inflationary pressures, especially as wage growth continues to outpace inflation and energy costs remain high.

The main concern is whether the early signs of economic softening will persist and help bring inflation back to the BOE’s target level of 2%. The UK’s inflation rate was 3.4% in May, significantly above the BOE’s target and the euro zone’s 2% reading in June. In April, the UK economy contracted due to global tariffs and domestic tax hikes.

Finance Minister Rachel Reeves acknowledged the disappointing growth figures and defended her fiscal policy decisions, stating that they are essential for stabilizing public finances and controlling inflation. The Office for Budget Responsibility forecasts 1% growth for the UK in 2025 and 1.9% by 2026. With limited fiscal flexibility, economists suggest that Reeves may need to raise taxes further to meet public spending commitments and borrowing limits.

While central bankers typically avoid commenting on fiscal policy, Bailey acknowledged the importance of coordination between monetary and fiscal policies. He noted that Reeves had set out a clear fiscal framework but stressed the need for flexibility. Bailey also highlighted the importance of a robust fiscal policy as a backdrop to macroeconomic stability.

As the UK faces high inflation and stagnant growth, monetary and fiscal policymakers are under increasing pressure to deliver results without compromising stability. Bailey also mentioned that the BOE is considering reducing the annual run-off rate of government bonds from the current £100 billion to approximately £80 billion. This decision will be influenced by market demand for longer-dated government debt and the recent steepening of the yield curve.

The BOE has been unwinding its £895 billion quantitative-easing program since 2022 and will decide on the pace of unwinding for the year starting in October 2025 in the coming weeks. The decision will be closely watched and is expected to be more complex than previous years.