Bank of England governor Andrew Bailey said it is “too soon” to see the price effects from the trade and tariffs action.
Speaking at the European Central Bank’s annual Forum on Central Banking in Sintra, Portugal, Bailey said he was observing a “softening” in the UK economy and “softening in the labour market,” reinforcing expectations that the BoE’s next move on interest rates will be to lower them.
Earlier in the day, Bailey left the door open to a rate cut at the monetary policy meeting in August.
“I think the path of interest rates will be gradually downwards, I’ve not changed my mind on that,” Bailey told CNBC ahead of the summit.
Futures markets are pricing in a 75% chance that the monetary policy committee will lower the base rate from 4.25% to 4% in August, with two more quarter-point cuts anticipated by year-end.
Bailey noted that the UK labour market, an important source of inflation pressure, is beginning to cool.
“The key question” for the next MPC meeting, he said, is whether that softening “is going to come through and create the context where inflation will come back down to target”.
Read more: Eurozone inflation hits 2% ECB target after June interest rate cut
Average wage growth excluding bonuses slowed to 5.3% in May, according to the latest Office for National Statistics data, down from 5.6% a month earlier. Bailey said this easing, along with softer demand, would help bring inflation back to the Bank’s 2% target. It currently sits at 3.4%.
Bailey also welcomed the decline in energy prices following the Israel-Iran ceasefire. This, he said, created a “helpful backdrop” for the MPC’s deliberations.
He also acknowledged the impact of global uncertainty on UK business investment, suggesting the BoE may need to prioritise supporting growth. With British businesses “putting off investment decisions,” Bailey hinted that further tightening could be counterproductive.
Elsewhere in Sintra, US Federal Reserve chair Jay Powell echoed Bailey’s caution on tariffs, saying the full inflationary effects of Donald Trump’s recent trade measures had yet to materialise.
“If you ignore the tariffs for a second, inflation is behaving pretty much exactly as we have expected and hoped that it would,” Powell said. “We haven’t seen the effects much yet from tariffs and we didn’t expect to by now.”
He added: “We went on hold when we saw the size of the tariffs, and essentially all inflation forecasts for the United States went up materially as a consequence … We didn’t overreact. In fact, we didn’t react at all. We’re simply taking some time.
