The Bank of England is prepared to make larger interest rate cuts if the job market shows signs of slowing down, its governor has said.

In an interview with the Times, Andrew Bailey said “I really do believe the path is downward” on interest rates.

Interest rates currently stand at 4.25% and will be reviewed at the Bank’s next meeting on 7 August, when many economists expect the rate will be cut.

They affect mortgage, credit card and savings rates for millions of people.

Speaking to the Times, Mr Bailey said: “I think the path [for interest rates] is down.

“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?”‘

He said the UK’s economy was growing behind its potential, opening up “slack” that would help to bring down ­inflation.

Slack refers to the amount of unused resources in an economy, such as working factories that are not producing anything or people who cannot find a job.

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

The governor said there were consistent signs that businesses were “adjusting employment and hours” and were giving smaller pay rises following UK Chancellor Rachel Reeves’ move to increase employers’ National Insurance contributions (NIC).

Reeves raised NICs for employers from 13.8% to 15% in April this year, in a move the government estimated would generate £25bn a year.

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.

Meanwhile, the number of people available for work has jumped at its fastest pace since the pandemic, according to a survey from auditor KPMG and the Recruitment and Employment Confederation trade body.

Ian McAllister, chief executive of security firm MAN Commercial Protection, told the BBC’s Today programme that the employer NIC increase had made hiring people “challenging”.

“Our big concern is a recession,” he said, adding that a rate cut is “obviously a benefit to all of us”.

Louise Dudley, portfolio manager at investor Federated Hermes, told Today that Mr Bailey’s comments suggested a rate cut was likely “sooner rather than later”.

Interest rates were left unchanged during the Bank’s last meeting in June, following two cuts earlier in the year.

During that meeting, Mr Bailey also said interest rates would take a “gradual downward path”.

The UK economy contracted by 0.1% in May, after also shrinking in April, according to the Office for National Statistics (ONS).

The unexpected dip was mainly driven by a drop in manufacturing, while retail sales were also “very weak”, said the ONS.