By Mike Riddell, portfolio manager of the Fidelity Strategic Bond fund

Almost 40 years ago, Diego Maradona scored what is widely considered the best goal in football history against England in the World Cup quarter final in Mexico. This summer the FIFA World Cup returns to Mexico, alongside the US and Canada. 

Maradona sadly passed away in 2020, but he lives on in the world of monetary policy. Former Bank of England Governor Mervyn King, in one of the best known central bank analogies, gave a speech back in 2005 referring to the ‘Maradona theory of interest rates’.  

At first viewing, King argued, it appeared that Maradona dribbled around half of the England team and the goalkeeper, before sliding the ball into the corner of the net.  But the reality was Maradona in fact ran in almost a straight line after he had collected the ball in his own half. He beat the defenders by feinting to the left and right, but he instead went directly towards goal. 

King likened this to the role of a central bank, and the power of forward guidance. If, for example, a central bank is worried about the risk of growth or inflation running too hot, it can indicate it may hike rates in future. Markets react by pricing in hikes, and longer term borrowing costs for consumers and businesses shift higher. This serves as a tightening in financial conditions – growth slows, inflation is lowered, and the central bank achieves its goal without changing direction.

When King came up with the Maradona theory, I have it on good authority there was some pushback within the Bank of England. If you tell markets about the Maradona theory and that you don’t necessarily mean to change policy, then won’t markets learn to anticipate the dummy, making forward guidance useless? But King was understandably rather in love with his analogy and published the speech anyway. 

See also: Fixed income outlook: Central bank policy and AI debt issuance to drive 2026 markets

Central banks have had great success applying the Maradona theory over the past two decades. Forward guidance successfully kept yields low post the 2008 financial crisis, and again immediately post Covid (although maintaining low rates in 2021-22 turned into a major policy error).

As a bond fund manager, the key is to sniff out another Maradona. Do central banks really intend to do what they suggest, or is it just another feint to get you to do their work for them? Is their forward guidance credible?

Increasingly, it feels the messaging out of a number of European central banks is a little suspect. In December, the Bank of England cut interest rates on a very narrow 5-4 vote, after Governor Andrew Bailey switched from voting for a hold to a 25bps cut. Following the UK Budget, the Bank of England now assumes UK inflation will be close to 2% from April next year. The labour market has been steadily deteriorating all year, as the Bank of England acknowledged. 

But the BofE doesn’t want loads of cuts getting priced in, or else it risks UK inflation expectation getting unanchored again. Most of those voting for a cut continued to express concern about wage growth and inflation, and the majority of the hawks even more so. Markets are only fully pricing in one more cut next year as a result. But if growth is weakening and inflation is at target, why would the BofE stop at just one cut, leaving rates at 3.5%?  Surely there is room to do a lot more.

Meanwhile, the ECB has revised up its growth forecast, eurozone bond yields have jumped sharply higher, and markets are now pricing in an ECB hike about a year from now. However, the eurozone economy is especially sensitive to longer term bond yields, and as a large open economy, is also greatly impacted by currency moves. The stronger euro and jump higher in eurozone bond yields serve as a substantial drag on future economic activity. So ECB communication is tightening financial conditions, which will slow growth, and then makes future rate hikes less likely, not more.

We’ve been moving longer of rate duration in Europe recently as a result.  And we also think pound sterling could substantially weaken from here if the Bank of England rate setters use their hands to move rates low in order to achieve their inflation goal.