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The Bank of England (BoE) is ready to lower interest rates further if the UK job market begins to show clear signs of slowing down, according to governor Andrew Bailey.

Speaking in an interview with The Times, Bailey expressed a cautious yet optimistic outlook, suggesting that “the path is downward” for interest rates, currently set at 4.25%.

While the next Bank of England meeting is scheduled for 7August, with many economists expecting a rate cut, the central bank’s stance remains "gradual and careful" as inflation remains above target.

Bailey said the UK's economy was growing behind its potential, opening up "slack" that would help to bring down ­inflation.

He said: “If we saw the slack opening up much more quickly, that would lead us to a different conclusion.

“I think the path [for interest rates] is down. I really do believe the path is downward but we continue to use the words ‘gradual and careful’ because … some people say to me, ‘Why are you cutting when inflation’s above target?'"

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Slack refers to the amount of unused resources in an economy, such as working factories that are not producing anything or people who cannot find a job.

Bailey's comments come amid growing market speculation, with investors now pricing in an 85% chance of a rate cut, up from 76% just a week earlier.

The City is anticipating a 0.25 percentage point reduction, which would bring the BoE’s key interest rate down to 4%, but market analysts are keeping a close eye on upcoming data, particularly inflation and employment figures.

Victoria Scholar, head of investment at Interactive Investor, noted that the weak GDP figures, coupled with deteriorating jobs data, strengthen the case for a rate cut in August.

“Friday’s disappointing GDP figures, combined with these weak jobs figures boost the case for the Bank of England to cut interest rates in August. The central bank’s governor Andrew Bailey told The Times ‘slack’ was opening up in the labour market, and he believes ‘the path is downward’ for interest rates.

“All eyes are on Wednesday’s inflation report with CPI expected to remain at remain around 3.4% in June, roughly unchanged for the third consecutive month.”

Enrique Diaz-Alvarez, chief economist at Ebury, said the upcoming employment data could provide crucial insights into the health of the UK economy.

“Thursday's publication of the May/June employment data is critical, perhaps even more so than Wednesday’s inflation report, which is expected to show little change from the previous month. By Thursday afternoon this week we, and the Bank of England for that matter, should have a clearer view of the extent of weakness in UK economic data.

“Last week’s dismal monthly GDP print for May was not at all an optimistic sign, as this almost guarantees that Britain’s economy contracted on a quarterly basis in the second quarter. Not only does this make an August rate cut from the Bank of England increasingly likely (almost 90% priced in by swap markets), but it also raises the risk of additional tax hikes in the autumn, which now seem practically inevitable.”

Treasury minister Darren Jones hinted at the possibility of freezing income tax thresholds beyond 2028 in a bid to balance the public finances. Though Jones clarified that the government had no immediate plans to extend the freeze, he left the door open to further adjustments in the future.

In an interview on ITV’s (ITV.L) Good Morning Britain Jones said: “The thing I can tell you is that our manifesto commitment coming into this election was that we were not going to increase the headline rate of income tax or employee national insurance on working people in the pay slips that people get when they go to work or on VAT because we know that that disproportionately affects people on lower incomes because they spend more of their money on the day to day shop, essentially."

Bailey pointed to signs that businesses are adjusting employment practices and limiting wage growth as a result of the government’s increase in national insurance contributions (NICs). From April 2023, UK employers saw a rise in NICs from 13.8% to 15%, expected to generate £25bn annually.

Official figures recently revealed a drop in job vacancies, which fell to 736,000 in the three months leading to May, the lowest level since the height of the COVID-19 pandemic in 2021, when many businesses halted hiring. This, combined with declining economic growth, suggests that the UK labour market may be cooling.

Jones, however, downplayed the broader economic impact of the government's tax policies. “We’ve created hundreds of thousands of new jobs across the economy, and in the first quarter of this year, the UK had the fastest-growing economy in the G7,” he said.

“Of course, we had that particular tax decision in the budget last year, because our commitment was to protect working people in their pay slips. And I recognise the independence of the bank governor.”