🇬🇧 UK Inflation Eases, but Outlook for Rate Cuts Remains Uncertain — BOE Governor Signals Caution

Bank of England (BOE) Governor Andrew Bailey has confirmed that UK interest rates are likely to trend “gradually downward” — but emphasized that any move will depend on incoming economic data.

Speaking at the ECB’s annual forum in Sintra, Bailey hinted at a possible August rate cut, but stopped short of making firm promises.

📉 Rate Cut in Sight?

Markets expect the BOE to reduce rates by 25 basis points — from 4.25% to 4% — at its August meeting. But inflation remains sticky, and wage growth is still outpacing price stability.

📊 Inflation Snapshot:

• May UK CPI: 3.4% (well above BOE’s 2% target)

• Eurozone CPI: 2% (June)

Bailey warned that a key risk remains whether early signs of economic weakness will be enough to return inflation to target.

💬 “The path of rates depends on how the data evolves,” said Bailey.

Meanwhile, April GDP data showed a contraction, pressured by tax hikes and global trade tensions.

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🇬🇧 Fiscal Tightrope: Reeves Stands Firm on Spending Rules

UK Finance Minister Rachel Reeves defended strict fiscal rules, stating they are essential for macroeconomic stability, despite rising political pressure.

💸 Key Constraints:

• Borrowing can’t fund daily spending

• Sluggish growth + rising debt costs tightening fiscal space

• OBR forecast: 1% GDP growth in 2025, 1.9% in 2026

Bailey acknowledged Reeves’ fiscal discipline, but added a call for “flexibility where needed” — especially as economic uncertainties persist.

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📉 Quantitative Tightening: BOE Eyes Slower Bond Sell-Off

Bailey also revealed the BOE may slow the pace of unwinding its £895B QE program. The current £100B annual runoff rate — mainly through gilts — is under review.

🔍 What’s Driving It:

• Steepening yield curve

• Weak demand for long-dated government debt

• Illiquidity in longer-term bonds

A decision is expected by September, as the BOE finalizes its strategy for the next fiscal year beginning October 2025. Analysts predict the runoff could be scaled back to £80 billion.

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🔍 Takeaway:

The BOE is navigating a tricky path — balancing inflation control with weak growth, tightening fiscal space, and market fragility. All eyes now on August’s rate decision.

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