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Bank of England governor Andrew Bailey has indicated that interest rates are likely to continue their downward path, albeit cautiously, amid signs that Britain's labour market is softening.

"The path of [interest] rates is still downwards," Bailey told the House of Lords Economic Affairs Committee on Tuesday, "but it is going to be very gradual and very careful because we've got this [inflation] bump and we got to see that come out."

UK inflation dipped to 3.4% in May, still well above the Bank’s 2% target. This led the BoE to hold interest rates steady at 4.25% at its latest meeting, although financial markets anticipate a cut in August.

Bailey described the current level of interest rates as "restrictive," but offered no explicit guidance on the direction of monetary policy ahead of the next rate-setting meeting. “In these circumstances we are particularly careful about what we say on that front because the world is just so uncertain,” he said.

Nevertheless, Bailey acknowledged growing evidence that may support a shift towards looser policy. “We are starting to see softening of the labour market,” he said, adding that while “pay increases are still well above a level consistent with the target... they are coming off”.

Earlier in a separate event, deputy governor Dave Ramsden was more explicit, saying there were clear signs of weakening in the labour market and that he was more worried that inflation could fall below the central bank's forecasts.

Read more: Bank of England in 'uncomfortable place' with inflation, says rate-setter

The backdrop of global instability further complicates the Bank’s outlook. Bailey cautioned that monetary policy cannot ignore wider geopolitical shifts, singling out trade tensions between the US and its partners.

“We have to come back, at every meeting, at what's going on in the world,” he said. He specifically pointed to US president Donald Trump’s trade policies as a source of growing uncertainty: “It is very unpredictable where this is all going to end up. Clearly we are coming towards the end of the 90-day period that President Trump set out for reaching agreements. We have one agreement so far, which is with the UK. That obviously isn’t implemented yet... So quite where this is going to go to, I’m afraid we don’t know at this stage.”

Bailey warned that escalating trade tensions would drag on global growth. “Fragmenting the world economy is bad for activity and bad for growth in the world economy,” he said, also highlighting risks to innovation from reduced trade flows. He added that the inflationary impact of tariffs is “more ambiguous,” noting they could either raise prices through supply chain disruption or dampen inflation if redirected exports increase UK market supply.