Futures markets foresee only one interest rate cut at the Bank of England’s April meeting this year. Tax and energy hikes from 2025 are expected to drop out of annual CPI comparisons soon, allowing the path to the 2% inflation target to clear. A slowing UK economy is seen as a green light for the central bank to accelerate monetary easing.

Managers of the Jupiter Strategic Bond fund believe slowing inflation could allow the Bank of England to implement deeper interest rate cuts than currently anticipated. They predict up to four rate cuts in 2026 due to the deteriorating UK economic backdrop. The fund has performed well, ranking in the top quartile for 15-year performance.

UK inflation rose to 3.4% in December, exceeding the 2% target. However, fund managers view the current higher inflation figures as an “optical illusion” due to 2025 tax and energy hikes, which will soon fall out of annual comparisons. The BoE expects inflation to return to target in the second quarter of 2026.

The Bank of England closely monitors the UK jobs market and wage data. With signs of a softening labor market and easing salary growth, the BoE may have room to ease monetary policy. Managers believe the BoE may need to cut rates further to support the economy amid lackluster growth and declining service inflation.

Expectations for the Bank of England’s terminal or neutral rate are considered too high by fund managers. They predict a neutral rate between 3.25% and 3.50%, higher than the current 3.75% bank rate. Lower inflation and interest rates could lead to substantial outperformance for gilts.

UK gilts could outperform if the Bank of England implements more rate cuts than expected. This could drive bond prices higher and yields lower. A potential decline in mortgage rates could provide further support to the UK economy. Sterling may weaken if UK rate cuts outpace other central banks.

Managers expect European and emerging market bonds to outperform, particularly in regions with strong fiscal prudence. They predict rate cuts in these regions in the near future, similar to expectations for the UK. The managers increased their exposure to the UK early, aiming for good yields while waiting for potential rate cuts.

Read more at Morningstar: Bank of England Could Cut Interest Rates 4 Times in 2026, Jupiter Bond Managers Say