Bank of England Governor Andrew Bailey has indicated that interest rate reductions could happen more quickly if signs of a weakening labour market persist.
In a recent interview with The Times, Bailey stated he is confident the direction for interest rates is downward. “I really do believe the path is downward,” he said, reiterating the Bank’s cautious approach. Interest rates currently sit at 4.25% and will next be reviewed at the Bank’s Monetary Policy Committee meeting on 7 August, where many economists anticipate a rate cut.
Bailey emphasized the importance of a “gradual and careful” strategy, especially as inflation remains slightly above the Bank’s 2% target. “Some people ask why we’re cutting when inflation is still above target,” he noted, but explained that economic growth remains below its potential, creating what economists call “slack” — unused capacity in the economy, such as idle workers or underutilized production.
“If this slack were to widen more rapidly, we’d have to rethink our stance,” Bailey added.
The UK labour market has been showing signs of softening. Employers are scaling back on hiring and adjusting staff hours, and wage growth appears to be slowing. Bailey linked these shifts partly to April’s increase in employer National Insurance contributions (NICs), a policy introduced by Chancellor Rachel Reeves. The NIC rise from 13.8% to 15% is projected to raise around £25 billion annually.
Official data shows that UK job vacancies dropped to 736,000 in the three months leading to May — the lowest since 2021. At the same time, the number of available workers surged, according to a joint report by KPMG and the Recruitment and Employment Confederation.
Ian McAllister, CEO of MAN Commercial Protection, told the BBC’s Today programme that higher NICs have made hiring more difficult. “Our biggest worry is a potential recession,” he said. “Any interest rate cut would be good news.”
Louise Dudley, a portfolio manager at Federated Hermes, said Bailey’s comments point toward a rate cut coming “sooner rather than later.”
The Bank of England held rates steady at its last meeting in June, following two earlier cuts this year. At that time, Bailey also described the future path of rates as moving “gradually downward.”
Recent economic data supports the cautious approach. The UK economy shrank by 0.1% in May, following a similar contraction in April. The Office for National Statistics (ONS) attributed this to a drop in manufacturing output and weak retail sales.
