BOE Governor hints at rate cuts, but inflation clouds UK’s recovery

Bank of England (BOE) Governor Andrew Bailey has reaffirmed that interest rates in the UK are set to move “gradually downwards,” even as the central bank faces a delicate balancing act between curbing inflation and reviving weak economic growth.

Economists expect a 25 basis point rate cut at the BOE’s next meeting in August, which would lower the benchmark rate from 4.25% to 4%.

Still, Bailey emphasized that the Monetary Policy Committee must remain vigilant about lingering inflationary pressures, particularly as average wage growth continues to outpace inflation and energy costs remain elevated.

The UK’s inflation rate was 3.4% in May, well above the BOE’s 2% target and the euro zone’s 2% reading in June. Meanwhile, in April, the UK economy contracted amid headwinds from global tariffs and domestic tax hikes.

Reeves defends fiscal rules as growth stalls and tax pressures mount

Finance Minister Rachel Reeves acknowledged the disappointing growth figures and defended her fiscal policy decisions, saying they were essential to stabilizing public finances and taming inflation.

“The necessary choices” made under her fiscal rules, which prohibit day-to-day spending from being funded by borrowing, are being tested by weaker tax revenues and rising debt interest costs. The Office for Budget Responsibility forecasts 1% growth for the UK in 2025 and 1.9% by 2026.

With limited room to maneuver, economists say Reeves may be forced to raise taxes further, as public spending commitments and borrowing limits tighten the fiscal leash.

While central bankers typically avoid wading into fiscal policy, Bailey acknowledged the importance of coordination, saying it was “important that Reeves had set out a very clear fiscal framework.” Yet, he stressed the need for adaptability: “There should be a suitable amount of flexibility in that.”

He added that he was aware that the chancellor is very committed to having a robust fiscal policy, which is important as a backdrop to macroeconomic stability.

As the UK navigates the twin challenges of high inflation and stagnant growth, monetary and fiscal policymakers face increasing pressure to deliver results without derailing stability.

BOE weighs slower bond unwinding

Bailey said that the BOE is also considering offloading fewer government bonds over the coming year than the current £100 billion ($138 billion) annual run-off rate amid questions about market demand for longer-dated government debt.