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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.

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.

Meanwhile, Megan Greene, an external member of the Bank’s Monetary Policy Committee (MPC), said the Bank finds itself in an “uncomfortable place” as it weighs risks to both inflation and growth. Speaking at the National Institute of Economic and Social Research, Greene said: “The main messages for me remain the same: underlying activity is weak, the labour market has loosened further and the disinflationary process continues, albeit with an elevated plateau of inflation around 3.5% for the second half of this year.”

Greene also flagged risks from geopolitical tensions and volatile energy prices, particularly in the Middle East.

Ramsden, who was among three MPC members to vote for a rate cut this month (in a 6–3 split), reinforced the case for a cautious easing. Speaking at the Barclays-CEPR Monetary Policy Forum, he described his vote to cut rates as “a finely balanced judgement,” but insisted it was “robust for two main reasons”.

“First,” he said, “because even at 4% I assess that monetary policy would remain clearly in restrictive territory. So if evidence emerged that pointed to higher inflation in the medium term then Bank Rate could be held higher for longer than would otherwise be the case.”

“Second, given the environment we are operating in, I think it is important that monetary policy is outlook-dependent and should respond — and be seen to respond — when the evidence on the outlook requires it.”

“I continue to take a watchful and responsive approach to setting policy,” Ramsden added. “This is in line with the emphasis the MPC puts in its collective communications on policy not being on a pre-set path and that we will consider the degree of restraint which is required from meeting to meeting."

The Bank of England will announce its next decision on interest rates on 7 August.