Bank of England Governor Andrew Bailey warns that weakening demand in the UK economy could help curb inflation, but uncertainties in the labour market and global trade

The Bank of England’s Governor, Andrew Bailey, has issued a stark warning about the UK’s economic trajectory, highlighting weakening demand as a potential factor in taming inflation. Speaking before the Treasury Select Committee, Bailey acknowledged that while inflation is projected to rise to 3.7% this year from 3% in January, the “underlying path” remains downward.

Bailey’s assessment comes amid growing concerns about the state of the UK economy. He dismissed fears of a self-reinforcing surge in inflation, insisting that current conditions are far from the economic turmoil seen in previous years. “The demand weakness argument may be getting a bit stronger relative to last year, but we will see,” Bailey told MPs, suggesting that economic activity is slowing down more than anticipated.

The central bank’s February decision to lower interest rates to 4.5% was made against a backdrop of rising global commodity prices, particularly in the energy sector. This decision, however, has not been without controversy, as policymakers remain divided over whether inflation risks are truly abating.

The debate within the Bank’s Monetary Policy Committee (MPC) is becoming increasingly heated. External MPC member Megan Greene sounded the alarm over inflation’s persistence, pointing out that 2025 could mark the fifth consecutive year in which inflation remains above the BoE’s 2% target. She warned that the prolonged inflationary trend might make the economy more vulnerable to second-round effects, where businesses and workers respond to persistent price rises by pushing for higher wages and increasing costs further.

Greene also argued that the recent economic slowdown could be driven more by supply-side issues rather than faltering demand, making inflation’s natural decline less certain. “It’s less likely inflation persistence will fade on its own accord, and more likely monetary policy will need to remain restrictive,” she cautioned.

BoE Chief Economist Huw Pill echoed Greene’s concerns, stating that he would not support an aggressive pace of rate cuts given the lingering risks of inflation. “I do not have yet full confidence that we have squeezed all of that out,” he remarked, suggesting that the fight against rising prices is far from over.

Beyond domestic concerns, Bailey highlighted the growing economic risks posed by escalating trade tensions, particularly the tariffs being imposed by the US on its global partners. He described the direct impact on UK inflation as “ambiguous” but warned that the broader implications for the world economy could be substantial. According to Bailey, resolving trade imbalances through multilateral forums, rather than unilateral actions, is essential to maintaining economic stability.

The UK’s economic outlook is further clouded by ongoing issues with official labour market data. Bailey expressed concerns about the accuracy of statistics produced by the Office for National Statistics (ONS), pointing to a striking decline in public sector productivity. Recent ONS data indicated that healthcare productivity fell by an annual rate of 2.4% in the third quarter of 2024, marking an 18.5% decline from pre-pandemic levels. Bailey described these figures as “both striking and puzzling,” questioning whether they reflect reality or statistical inconsistencies.

“If productivity had stayed level or followed pre-2019 trends, the impact on GDP would be ‘not trivial at all,’” Bailey noted, underscoring the challenges in measuring public sector output accurately.

With inflationary pressures, policy divisions, trade uncertainties, and questionable economic data all converging, the UK’s economic future remains uncertain. While weaker demand may help rein in inflation, the broader implications of a slowing economy could present an even greater challenge in the months ahead