Bank of England Governor Andrew Bailey said on Tuesday that interest rates are likely to fall gradually, though policymakers will be guided by incoming data at their next meeting in August.
Speaking at the European Central Bank forum in Sintra, Portugal, Bailey said: “I haven’t changed my mind on that… But in terms of where are we going to go in the next meeting? Well, we’ll see.”
Economists expect the central bank to cut its base rate by 25 basis points next month, reducing it from 4.25% to 4%, as inflationary pressures begin to soften. Average wages have been outpacing inflation, and energy prices are easing, though Bailey noted the key question was whether that softening would be sustained enough to bring inflation back to the Bank’s 2% target.
UK inflation fell to 3.4% in May, still well above the euro zone’s 2% reading in June. At the same time, UK economic growth remains sluggish. The economy contracted in April as new tax increases and trade frictions took effect.
Finance Minister Rachel Reeves acknowledged the latest growth figures were “clearly disappointing” but defended the government’s fiscal stance. Since introducing tax hikes last October to fund increased public spending, Reeves has maintained that day-to-day spending would not be funded by borrowing—rules she has described as “non-negotiable.”
However, the economic backdrop has deteriorated, with rising debt interest costs, weaker-than-expected tax receipts, and downgraded growth forecasts all complicating the fiscal outlook. The Office for Budget Responsibility in March projected UK growth of just 1% this year and 1.9% in 2026.
With the government committed to higher spending and constrained on borrowing, economists say Reeves may have little choice but to raise taxes further in order to meet her fiscal rules while pursuing economic growth.
