Bank of England governor Andrew Bailey is outlining four key areas that support the Bank’s decision to reduce the base rate to 4.25% and offer an indication of its intentions going forwards.

1. Inflation is falling 

“Disinflation in domestic price and wage pressures is continuing,” Bailey says.

Yes, headline inflation is expected to rise in the near term, but he doesn’t expect it to persist.

The Bank predicts it will rise to 3.5% “in coming months” – a little less than previously thought.

Rising water bills and energy prices are among the factors that will drive up inflation, but “we should not expect them to persist”.

Services inflation, meanwhile, should gradually ease, explains Bailey, adding persistence in wage growth is now the “main driver” of services inflation

2. Unproductiveness

A “small margin of slack” has opened in the UK economy, which is expected to widen over the next couple of years, he says.

“Heightened uncertainty, weak productivity growth and the continued restrictive stance of monetary policy have all been weighing on GDP growth recently.”

There is also weaker demand and businesses are cautious to invest, he says.

But investment and household spending should recover, supported by lower interest rates.

3. Slack to reduce inflation

This slack in the economy should help to return inflation to 2%, the Bank’s target, says Bailey.

Normalising wage growth is “particularly important” to help services inflation meet the goal.

“This process has still some way to go,” he says, adding annual private sector weekly earnings growth was 5.9% in the three months to February.

“We expect wage growth to moderate,” he says. Average pay rises in 2025 will be between 3.5% and 4%.

He now moves on to his fourth key message, the global economy, which we will cover in our next post. Stay tuned.