(Bloomberg) -- Bank of England Governor Andrew Bailey put the British central bank on a clear path to rate cuts. He also gave investors a few reasons to think the journey for policy makers in London may take longer than for those in Washington and Frankfurt.

Turmoil in the middle east, price pressures at home, the government’s fiscal policy and even rising living standards each could reignite inflationary pressures and force the BOE to keep rates at a 16-year high for longer than investors are betting, Bailey indicated in a Bloomberg TV interview Thursday.

His remarks set out what the BOE calls “upside” risks to its forecasts for a sunnier economic climate, with inflation slowing toward the 2% goal and a growth ticking higher. They explain why the BOE, which was the first major central bank to lift rates in 2021, now is likely to remain at the back of the pack when it comes time to ease.

“The world is still a fairly uncertain place,” Bailey said in the interview when asked why he’s not ready to say rates will be cut. “It’s a question really of being too soon to conclude that we’re on that sustained path to target. We always want to see the evidence.”

The remarks follow a decision by the BOE’s nine-member Monetary Policy Committee to leave the benchmark lending rate at a 16-year high of 5.25%. While officials dropped earlier guidance that rates may have to rise again, they also said they need more signs that inflation, now 4%, will fall and stay down sustainably.

Investors are betting the BOE will reduce its key rate a full percentage point this year, probably starting in June. Here are the factors the BOE and Bailey outlined that could interrupt that path:

Red Sea Attacks

The most immediate threat to inflation is from disruption to global supply chains that move through the Red Sea, the BOE said. More Houthi attacks on shipping or wider instability in the Middle East pose a “material risk” to the inflation outlook. Bailey is worried energy prices could take off again.

“There are still things going on in the world which I would say are not the normal turn of events,” Bailey said. “Those can have quite big effects. We want to see how these influence the evidence that is vital to us.”

Domestic Pressures

Bailey said officials are watching underlying domestic measures of inflation, including services and wage pressures. Those have proved stronger and sticker than in the US or Eurozone, with Britain’s labor market remains smaller than before the pandemic.

The BOE expects services inflation to drop to 4.9% in June from 6.4% now, but that would still be more than double the target for inflation in the broader economy. The headline Consumer Prices Index is expected to glide down to 2% by June but then bounce back up to 2.8% as the effect of falling energy prices over the last year drops out of comparisons. 

Richer Households

Another force that’s just starting to have an impact is a gain in UK living standards after a long period where inflation ate away the spending power of households. Real post-tax labor income will rise 2.1% this year — a rate of improvement only bettered four times in the past two decades, the BOE estimates. That reflects a jump in wages and slowing price pressure. 

Unemployment will average just 4.5% this year, only a little higher than today. Together, those factors could well make consumers feel more willing to spend — and pay higher prices. It’s already helping bolster the economy.

“Unemployment has not risen as we expected it would, and that’s good news,” Bailey said. 

Budget Tax Cuts

There’s a risk the government starts working against the BOE’s effort to rein in demand and price pressures. Prime Minister Rishi Sunak’s government is widely expected to call an election in the autumn, and Chancellor of the Exchequer Jeremy Hunt has signaled he’d like to cut taxes in his budget statement next month.

The BOE’s Monetary Policy Report suggest £20 billion ($25.5 billion) of business and personal tax cuts in Hunt’s Autumn Statement are inflationary. More could come in the March budget.

Hunt sounded buoyant speaking with broadcasters after the BOE’s decision, hailing “very positive news for families with mortgages, that interest rates appear to have peaked.” The government is hoping the economy will pick up steam before the election, which must be held by January 2025.

Bailey would not be drawn on its position with regard to tax cuts, saying only that the BOE takes government policy as given. 

Past Forecast Failures

The BOE has launched an independent review of its failure to forecast inflation accurately, which is being conducted by former Fed Chair Ben Bernanke and is due to report back in the spring. Inflation is moving in the right direction, but the UK has had setbacks in the past and the official labor market data is currently incomplete. Past failures would encourage caution. 

“We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates,” Bailey said.

No Urgency

The economy quite possibly skirted a recession that many predicted would be deep and long lasting through 2023. Instead, output either shrank by the smallest possible margin in the last quarter or stalled. Bailey says indicators point to an improvement in the past few weeks, suggesting the UK doesn’t need emergency measures to avoid a collapse. 

“There are signs that we’ve seen some pickup around the turn of the year,” Bailey said. “That’s a positive signal, and that’s why it helps to explain why in our projections and our forecast, we’ve actually got a gradual pickup in growth.”

--With assistance from Andrew Atkinson and Francine Lacqua.

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