BoE's Bailey sticks with 'careful' rate cut view as uncertainty deepens

By David Milliken and Suban Abdulla

LONDON, June 3 (Reuters) - Bank of England Governor Andrew Bailey said on Tuesday he was sticking with a "gradual and careful" approach to cutting interest rates as global trade policy turmoil increasingly clouds the outlook.

The BoE cut interest rates last month to 4.25% in a three-way split vote. It cited "heightened unpredictability" with markets buffeted by U.S. President Donald Trump's rapidly shifting trade policy.

"I think the path (for interest rates) remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty," Bailey told parliament's Treasury Committee.

While economists polled by Reuters last month expected the BoE to keep cutting rates by a quarter point every three months, financial markets now have only one rate cut fully priced in by the end of this year and just two over the next 12 months.

Bailey said he had not been surprised by recent data on inflation which jumped to 3.5% in April from 2.6% the previous month, and he added that the labour market had loosened. Cooling pay growth would be a "crucial" requirement for further interest rate cuts, he told lawmakers.

"Gradual and careful remain my ... guiding line," Bailey said of his thinking on future rate cuts, adding that he would not be drawn on his intentions for the June Monetary Policy Committee (MPC) meeting.

Deputy Governor Sarah Breeden, a centrist on the MPC, told lawmakers that she thought there was a case for cutting interest rates last month even without the global trade ructions.

Breeden was one of the majority of five to vote for a quarter-point interest rate cut last month, with the governor.

But Bailey said he was more undecided than Breeden ahead of the May interest rates decision.

"You should think of the majority as having a broad church within it," Breeden said.

WEAKENING GROWTH OUTLOOK

Official data showed Britain's economy expanded strongly in the first quarter of the year - at odds with downbeat business survey data. Bailey said this pointed to a "disjoint" in data sources that added to the uncertainty faced by policymakers.

"The surveys are probably, on average, a better predictor of the future than the immediately previous GDP number," Bailey said.

The BoE said last month it expected the strong growth in the January-to-March period would prove temporary with output likely to expand by 1% this year, speeding up only slightly to 1.5% growth in 2027.

External MPC member Swati Dhingra, who voted for a half-point rate cut last month, told the committee that evidence from supply chains pointed clearly to inflation cooling over the medium term - unlike in 2022 when inflation spiked to 11%.

Catherine Mann, an external member of the MPC who voted against cutting rates last month, said she thought that the labour market was cooling less than she had expected in February when she voted for a half-point cut.

She also said the BoE should consider reviewing the pace at which it unwinds past asset purchases rather than relying on extra rate cuts to try to offset upward pressure on long-term bond yields.

Bailey said it would be "important" to assess this quantitative tightening in light of changed market conditions since the last annual decision on its pace in September 2024, including a big rise in long-term government borrowing costs to the highest since 1998.

"I don't think the cause of the curve movement is quantitative tightening in its own right. But how it interacts with other causes - what's coming out of the U.S. for instance - will be something we will have to go over in the next month or two," he said.