The Bank of England is ready to make larger cuts to interest rates if the jobs market continues to slow down.  

The central bank governor Andrew Bailey told the Times “slack” was opening up in the UK economy, following the increase to employers’ national insurance contributions by 1.2% to 15% in the October Budget, a move the government estimated would generate £25bn a year. 

A slowing labour market should create downward pressure on inflation, Bailey added. 

Bank rate is currently 4.25%, following four quarter-point cuts in the last year.  

The next Monetary Policy Committee meeting is set for 7 August, with investors pencilling in two further quarter-point cuts in the second half of the year. 

Inflation is 3.4% above the Bank’s 2% target. The latest official reading for June is due on Wednesday. 

Average wages slowed to 5.2% between February and April, according to official figures earlier this month, easing from a 5.6% increase. 

However, Monetary Policy Committee members have long said they want to see wage growth fall below 5%. 

But Bailey said: “If we saw the slack opening up much more quickly, that would lead us to a different conclusion.” 

The governor added that firms were “adjusting employment and hours and also having pay rises that are possibly less than they would have been if the NICs change hadn’t happened”. 

Bailey said: “I think the path [for interest rates] is down. I really do believe the path is downward, but we continue to use the words ‘gradual and careful’ because … some people say to me, ‘Why are you cutting when inflation’s above target?’” 

The latest official figures show the number of job vacancies in the UK has dropped to 736,000 over the three months to May — its lowest level since 2021 when firms had halted hiring during the Covid pandemic. 

On Friday, the UK economy contracted by 0.1% in May, after also shrinking in April, according to the Office for National Statistics.