Investors face higher-for-longer rate outlook as global growth accelerates

Adam Kibble

Global economic growth is expected to reaccelerate in 2026 as the delayed effects of interest rate cuts combine with ongoing government spending, creating a supportive but increasingly complex environment for investors, according to Adam Kibble, multi-asset portfolio manager at Schroders.

Kibble said that both monetary and fiscal policy settings remain accommodating across major developed markets, helping to drive stronger growth but also increasing the risk of inflation becoming more persistent than expected.

“Global growth is showing clear signs of reacceleration as the impact of rate cuts since mid-2024 flows through to economic activity. However, with governments continuing to prioritise cost-of-living support and stimulus spending, we are entering a ‘run-it-hot’ policy environment that could see inflation stall or even rebound during 2026,” he said.

Kibble flagged that central banks globally appear to be nearing the end of their easing cycles, with markets beginning to reassess expectations for further rate cuts.

“In many regions, policy remains highly supportive for growth, but central banks are becoming increasingly cautious as inflation progress slows,” he said. “This is creating a higher-for-longer interest rate backdrop that investors need to be prepared for.”

In Australia, economic growth has rebounded more strongly than expected, supported by a resilient labour market and solid consumer spending.

Kibble believes that ongoing capacity constraints across parts of the economy were slowing the disinflation process, raising the likelihood of further policy tightening by the Reserve Bank of Australia (RBA), following this week’s interest rate increase.

“Recent data highlights strong domestic demand and improving business confidence, but inflation remains sticky,” he said.

“The RBA’s latest rate increase reflects the persistence of pricing pressures, and markets are increasingly recognising that further tightening may be required if inflation does not moderate as expected.”

The US economy also exceeded expectations through the second half of 2025, driven by strong consumer demand and capital expenditure.

Kibble said fiscal stimulus and earlier rate cuts have supported growth momentum in the US, but the outlook for further monetary easing remains uncertain.

“While markets continue to expect further rate cuts by the Federal Reserve later in 2026, this will largely depend on whether inflation shows a meaningful and sustained decline. Without clear progress on inflation, the scope for additional easing may be limited.”

Kibble said with inflation risks rising and central banks nearing the end of their easing cycles, managing interest rate risk remains critical.

“We continue to position portfolios for a potentially prolonged higher interest rate environment, maintaining low duration exposure while selectively allocating across global bond markets,” he said.

“We are favouring longer-term bonds in Australia to mitigate the impact of potential RBA tightening, while maintaining exposure to shorter-dated US bonds to capture potential easing opportunities and reduce volatility.”

Despite supportive growth conditions, Kibble said credit markets currently offer limited value due to historically tight spreads.

“Credit fundamentals remain strong, but valuations are stretched and compensation for risk is low. In this environment, we are maintaining a focus on high-quality, liquid credit exposures, particularly in Australia and Europe, where yield curves remain relatively attractive,” he said.

Kibble added that recent strength in the Australian dollar had provided opportunities to actively manage currency exposures.

“The Australian dollar strengthened significantly earlier in the year as interest rate differentials widened and expectations of RBA tightening increased,” he said.

“However, with sentiment indicators suggesting the currency had become overbought, we have begun reducing exposure at elevated levels.”

While the macroeconomic outlook remains broadly supportive for growth, Kibble believes that there is a risk that the progress on lower inflation has stalled and may reverse.

“With spreads tight and policy uncertainty rising, maintaining liquidity and flexibility remains key to navigating potential market volatility and capturing opportunities as valuations evolve.”