BoE's Bailey says uncertain outlook demands careful approach to rate cuts

By Padraic Halpin

DUBLIN (Reuters) -Bank of England Governor Andrew Bailey said on Thursday that the central bank's "gradual and careful" approach to future interest rate cuts was justified by ongoing uncertainty about the global trade picture and its impact on domestic inflation.

"Reading that is very hard at the moment.... It's why we keep using, as you know, these terms 'gradual and careful' in our approach," he said in a question and answer session at a finance industry dinner in Dublin.

Bailey voted with a narrow majority of the Monetary Policy Committee to cut interest rates to 4.25% from 4.5% earlier this month, though other policymakers wanted either faster or no loosening of policy.

Last week official data showed consumer price inflation jumped more sharply than markets or the BoE had expected to 3.5% from 2.6%, reflecting a rise in regulated household energy and water bills and unusually high airfares over the Easter period.

Bailey said it was unclear how much of the rise was due to seasonal effects and said the central bank would have another month's data to consider before its June rate decision.

"The less volatile part (of inflation), again it's gradually grinding down but very slowly," he said.

However, he also noted a rise in food price inflation. While Britain was not alone in that, it was something that had a "very big" impact on the public's perception of inflation, he said.

Labour market data had been largely in line with expectations, he added.

In a speech earlier in the evening, Bailey called for stronger trade and financial services ties with the European Union. Later he said he hoped it would be possible to fully resolve the United States' trade dispute with Britain.

"We don't want to lose the relationship with the U.S. We really want to get to the issues that are underlying this and help to solve them," he said.

Speculation that fragmentation in the global economy might cause the dollar to lose its reserve currency status was also wide of the mark, he said.

"We may see some rebalancing of activity (away from the dollar), but I don't think we're anywhere near that and I don't think we should want to be anywhere near that frankly," he said.

(Reporting by Padraic Halpin, writing by David Milliken, editing by Deepa Babington)