Key Takeaways
- Futures markets are pricing in only one interest rate cut this year, at the Bank of England’s April meeting.
- 2025 tax and energy hikes are likely to fall out of annual comparisons for CPI soon, clearing the path to the 2% inflation target.
- A slowing UK economy also “greenlights” the UK central bank to speed up monetary easing, fund managers say.
Slowing inflation might allow the Bank of England to make deeper interest rate cuts than futures markets are currently pricing, according to the managers of Jupiter Strategic Bond.
Ariel Bezalel and Harry Richards, co-managers of the £1.3 billion fund, say the deteriorating UK economic backdrop means that policymakers have more scope for monetary easing than is currently being priced in.
After four interest rate cuts in 2025, markets are anticipating two cuts or fewer in 2025, with April the most likely date for a cut in bank rate to 3.50%. The BoE makes its first interest rate decision of 2026 on Feb. 5.
“We think that the Bank of England might end up having to cut maybe as many as four times this year as the economy really starts to slow down,” says Bezalel, co-manager of the fund, which has a Morningstar Medalist Rating of Silver.
The fund was in the top 10% of performers within the global flexible bond - GBP hedged Morningstar category in 2025 after bouncing back from the bottom 10% in 2024. The fund is in the top quartile for 15-year performance, with an annualized return of 3.97% against the category average of 3.56%.
Fears of “sticky” inflation in the UK have been borne out by the latest Consumer Prices Index, which rose 3.4% in December from 3.2% in November, above the official inflation target of 2%.
But the managers say the current higher inflation figures are an “optical illusion” and that 2025’s hikes in national insurance tax, minimum wage, and utility prices will fall out of the annual comparisons in May and June figures. The BoE is expecting the inflation rate to fall back to target in the second quarter of 2026, but so far bond prices and yields are not reflecting a swift return to 2% inflation. The Jupiter managers say this is supporting UK government bond yields and makes the asset class attractive.
While the Bank of England has an inflation-targeting mandate, it also closely watches the domestic jobs market and wage data. In recent meetings the UK central bank has expressed anxiety about a “tight” jobs market and wages rising above inflation, both reasons to remain cautious on easing monetary policy. But recent data shows salary growth easing and the unemployment rate rising.
“Growth is pretty lackluster, and we’ve got a labor market that’s very visibly softening. Service inflation is coming down, wages are coming down. As we move forward, this could basically greenlight the Bank of England to say, actually, we’ve got room to ease,” Richards says.
Bezalel adds: “If anything, I think there’s a risk that the BoE is leaving rates too high for too long as they continue to look in the rearview mirror. I think they’ve got to get on and get cutting.”
What Is the Bank of England’s Terminal Interest Rate?
The managers believe that expectations for the terminal or neutral rate, the final policy rate after the Bank of England completes its cutting cycle, are too high. Currently, markets predict a neutral rate between 3.25% and 3.50%, compared with the current bank rate of 3.75%.
Richards says this is higher than predictions for the US rate, despite weaker growth in the UK than in the US.
“Inflation dynamics should really warrant that moving somewhere between what we see in Europe and the US, and that’s kind of what we’ve become accustomed to in the last 20 or 30 years of bond markets. And if that happens, there could be some substantial outperformance for gilts,” he says.
As government bonds reflect inflation and interest rate expectations, a drop in UK CPI would support lower interest rates, which would depress yields and increase prices.
And after a turbulent year in 2025, with a number of spikes in UK bond yields, a drop in borrowing costs could be a reprieve for the chancellor, Rachel Reeves.
Richards says that lower inflation and interest rates would provide lower interest costs for the UK government, potentially providing a positive feedback loop for the economy.
Bezalel says that on the whole, central banks are unlikely to raise interest rates, once the end of the monetary policy easing cycle has been reached.
“Even if they were to flip, it doesn’t feel like there’s going to be a big tightening cycle ahead of us. We’ve got to look at the bond markets where we feel that asymmetric profile is most prevalent. That applies especially to the likes of the UK.”
What BoE Rate Cuts Mean for Investors
- UK gilts could outperform if the Bank of England delivers more rate cuts than markets expect, driving bond prices higher and yields lower.
- Sterling could weaken if UK rate cuts outpace other central banks like the ECB and US Fed.
- Mortgage rates may fall further if the bank rate declines, supporting the wider UK economy.
What’s the Outlook for Global Government Bonds?
Beyond the UK, the managers are also expecting European bonds to outperform, especially in Italy, where the government’s focus is on reducing the fiscal deficit. In addition, they have increased their exposure to emerging markets, particularly Latin America and Brazil. The common denominator with the UK is that the managers are expecting all these regions to lower their interest rates in the near future.
Richards says: “Picking regions is really important. If you want to play yield compression, you want to play cuts, make sure you’re exposed to the markets with best fiscal prudence.”
For UK government bonds, the managers have predicted rate cuts before. Bezalel explains that the managers increased their exposure to the UK early, explaining some of the weaker performance in 2024.
Bezalel says: “We got into the UK a bit early, and we don’t mind that, because we were getting some really good yields and we’re getting paid to wait.”
BoE Interest Rate Decision Dates
Current policy rate: 3.75%
- Feb. 5, 2026.
- March 19, 2026.
- April 30, 2026.
- June 18, 2026.
- July 30, 2026.
- Sep. 17, 2026
- Nov. 5, 2026.
- Dec. 17, 2026.
