Bailey warns of a weak UK economy, but high inflation may limit the central bank's room to cut interest rates.

As UK Chancellor of the Exchequer Rishi Sunak flies to Washington D.C. to promote economic growth to investors, Bank of England Governor Andrew Bailey has expressed concerns about the UK economy running "below potential levels" and ongoing weakness in the job market. Bailey warned on Tuesday that the UK economy faces two risks: inflation remains above target levels, and the labor market is weakening. The intertwining of these two factors makes the timing of the next interest rate cut by the Bank of England uncertain. Bailey is a key member with voting rights in the Bank of England's nine-person Monetary Policy Committee. The market currently expects limited chances for the central bank to cut rates again this year. On the same day Bailey made his remarks, the International Monetary Fund (IMF) predicted that the UK would have the fastest rising inflation rate among the Group of Seven (G7) countries in the next two years. Meanwhile, official data showed that UK unemployment has risen to its highest level since 2021. Speaking at an International Monetary Conference in Washington, Bailey said, "We see some signs of weakness in the labor market." He added that he had visited various parts of the UK in recent weeks and the overall situation was as he had perceived. "We also saw this in the data published this morning," he said. Despite Bailey's concerns about the UK economic situation, UK Chancellor of the Exchequer Rishi Sunak, who is set to arrive in Washington later on Tuesday, plans to make "economic stability" the core message of his overseas promotion. In a statement released before his trip, Sunak said he would adhere to the principles of fiscal prudence and focus on "creating favorable conditions to enhance productivity, attract investment, and consolidate the UK's position as a strong and reliable partner in the stable global economy." However, the lingering inflation issue that the Bank of England has not fully contained - with the current inflation rate still close to twice the target - is becoming one of the main threats to economic stability. IMF calls for caution in interest rate cuts The International Monetary Fund called on the Bank of England on Tuesday to "exercise caution" in further interest rate cuts, and predicted that UK prices would rise by 3.4% in 2025 and 2.5% in 2026. The IMF's chief economist warned that rising wage pressures and household inflation expectations could bring new upward risks. While Bailey acknowledges that high inflation remains a threat, he also points out that economic weakness may suppress price increases in the future. His comments did not clearly indicate whether he believes the soft job market is more worth watching than domestic price pressures ahead of key monetary policy meetings to be held in November and December. Bailey stated that UK economic growth is "slightly below potential levels," and mentioned signs of weakness in the job data released that day - with the unemployment rate rising to 4.8%, the highest level in over four years, and wage growth slowing more than expected. As a result, market expectations for a rate cut by the Bank of England in December have risen to 35%. Bailey also mentioned that his focus on factors driving inflation up has decreased. He said, "The main reason for current inflation is not due to changes in the balance of supply and demand in the economy, but it is still inflation." On the same day, another policy maker at the Bank of England, Alan Taylor, also expressed concerns about the UK economy, warning that the risk of a "hard landing" is rising.