Bank of England governor Andrew Bailey left the door open to a rate cut at the upcoming monetary policy meeting in August, sending UK gilt yields falling.
With British businesses “putting off investment decisions” due to global uncertainty, he seemed to suggest that the monetary policy committee should prioritise rate cuts to help support the economy rather than overly worry about inflation.
One factor supporting more potential cuts is that the UK jobs market “is softening”, Bailey said in a TV interview, with wage growth starting to ease, which would help bring consumer price inflation down from its current 3.4% to the Bank’s 2% target.
Average wage growth excluding bonuses slowed to 5.3% in the most recent ONS data, for May, down from 5.6% year-on-year in April.
“I think the path of interest rates will be gradually downwards, I’ve not changed my mind on that,” Bailey told CNBC while attending a central bank summit in Portugal.
He said the “key question” for the upcoming MPC meeting is whether the softening in the labour market “is going to come through and create the context where inflation will come back down to target”.
Bailey said the recent drop in energy prices after the Israel-Iran ceasefire last week was a helpful backdrop to the meeting.
Markets are pricing roughly a 75% chance of the BoE’s monetary policy committee cutting the base rate to 4% at the August meeting from the current 4.25%, with two further quarter-point moves to 3.75% by the end of the year.
Asked about the steepening of the gilt yield curve, where short-dated UK government bond yields have fallen while long-dated yields have risen, Bailey said it was likely to do with rising uncertainty in the global economy.
Bailey said the “increase in uncertainty and predictability is definitely coming through in terms of activity and growth. When I go around the country talking to businesses, which I do a lot, what they tell me is that they are putting off investment decisions.”
In the last MPC meeting, the overall vote was to keep interest rates unchanged at 4.25%, though there was a split vote, with three members calling for a cut.