Are higher interest rates here to stay?

Damon Frith, Wealth Editor | NAB Private Wealth

For much of the past two decades, investors have been accustomed to a world of falling inflation, declining interest rates and rising asset values. Following the 2008-09 global financial crisis (GFC), interest rates fell to record lows across much of the developed world, supporting economic activity and boosting the value of financial assets.

Today, that backdrop is being challenged.

A sharp rise in oil prices and shifts in government bond yields have driven recent market volatility, prompting investors to reassess the outlook for inflation and interest rates. Brent crude oil traded well above US$100 a barrel for much of October, but plunged below that level after President Donald Trump's Republican Party lost control of Congress in the 3 November US midterm elections. Prices had already begun to ease on reports of a draft US–Iran peace proposal, and Brent then fell 8.7% on 4 November (US time) to settle at US$94.62 a barrel as traders bet that a weakened Trump would face greater pressure to end the war with Iran. ^[7]

Central banks, however, are still dealing with the inflation that earlier oil-price rises helped fuel. On 3 November, the Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points to 4.85%, following a rise to 4.60% in September. It was the RBA's fifth increase in 2026 and took the cash rate to its highest level since 2008. In the United States, the Federal Reserve held its policy rate at 3.75–4.00% in October after raising it in September.

With inflation remaining a central theme globally the question is whether this is a temporary setback, or could the post-pandemic world prove more inflationary than investors had anticipated?

A different interest-rate backdrop

Interest-rate cycles over the past 20 years have been shaped by several major events.

The period before the GFC was characterised by relatively strong global growth and rising interest rates. That changed dramatically after 2008, when central banks cut rates aggressively to support economic activity and stabilise financial systems.

For much of the decade that followed, policymakers grappled with weak inflation, subdued wage growth and modest economic expansion. Even when central banks began normalising policy settings, rate increases were generally gradual by historical standards.

The inflation outbreak that followed the COVID-19 pandemic marked a significant turning point. Supply-chain disruptions, strong consumer demand, labour shortages and fiscal stimulus contributed to inflation reaching levels not seen for decades. According to the International Monetary Fund's World Economic Outlook, October 2024, the inflation surge reflected supply bottlenecks, strong demand, fiscal and monetary stimulus, and higher commodity prices. ^[1]

Inflation eased considerably from its 2022 peaks in most major economies, but it has turned higher again in 2026 as energy prices have surged. The International Monetary Fund now expects global inflation to rise to 4.7% this year, before easing to 4.1% in 2027. ^[2]

In Australia, inflation has picked up again. The Consumer Price Index rose 4.3% in the 12 months to September 2026, up from 4.0% in the 12 months to August, while trimmed mean inflation, a measure of underlying inflation, rose to 3.6%. Housing (up 5.2%) and transport (up 8.7%, reflecting higher fuel prices) were the largest contributors.

That renewed lift in inflation prompted the RBA's November rate rise. In its November Statement on Monetary Policy, the RBA forecast headline and underlying inflation to remain above 3% until the end of 2027, and not to return to the midpoint of its 2–3% target range until mid-2028. ^[3]

Why some economists believe inflation could prove more persistent

There is no consensus that the world is entering a permanently higher inflation era. However, several leading institutions and researchers have identified factors that could make inflation slower to return to central bank targets than many investors previously expected.

The RBA's own assessment points in the same direction. In announcing its November decision, it said inflation remained elevated and broadly based, and that domestic capacity pressures were a little tighter than it had previously thought. Higher fuel and other commodity prices linked to the Middle East conflict were adding to costs, and many firms were raising prices or looking to do so. 

Research published in the BIS Quarterly Review found that services inflation has retreated more slowly than goods inflation during the post-pandemic disinflation process. The researchers argued that services prices tend to be more persistent because services are more labour-intensive and less responsive to commodity-price movements. They suggested this could slow the final stage of disinflation and may require monetary policy to remain restrictive for longer. ^[5]

Similarly, an IMF Working Paper examining inflation outcomes across 130 economies found that historical inflation experience and the scale of domestic energy-price shocks explained much of the variation in post-pandemic inflation across countries. The researchers also found that the pass-through from energy prices to headline inflation intensified after the pandemic. They concluded that central-bank credibility and anchored inflation expectations may improve resilience to future supply shocks. ^[6]

These findings do not imply that inflation will remain permanently elevated. Rather, they suggest that the journey back to inflation targets may be uneven, particularly if additional supply-side shocks emerge.

What it means for Australian borrowers

For Australian borrowers, the most immediate effect of the November decision is higher repayments.

Tighter policy is already being felt. The RBA reports that banks have passed recent cash-rate increases through to deposit and lending rates, that scheduled mortgage payments have risen relative to household disposable income, and that demand for new housing loans has declined noticeably. In November, it also noted that housing prices had fallen significantly and the unemployment rate had risen.

Businesses also face consequences from higher rates. Rising borrowing costs can make it more expensive to fund investment, expansion and acquisitions, while higher bond yields typically increase the cost of refinancing debt.

Implications for investors

For investors, a world of higher inflation and higher interest rates creates both opportunities and risks.

One of the major beneficiaries of falling rates over recent decades was growth-oriented assets, particularly companies whose valuations rely heavily on future earnings growth.

When bond yields rise, those future earnings are discounted more heavily, which can place pressure on valuations. Technology shares came under renewed pressure in September and October as bond yields rose and inflation concerns resurfaced, although doubts about the returns from heavy spending on artificial intelligence also played a part. In Australia, listed technology companies have fallen sharply over the past year.

By contrast, sectors that benefit from inflationary conditions may become more attractive.

Energy companies can benefit from higher oil prices, while resource businesses may benefit if commodity prices remain supported. Companies with strong pricing power may also be better positioned to preserve profit margins when costs increase.

A potentially improved environment for income investors

Higher interest rates may also offer advantages for investors seeking income.

During much of the post-GFC period, retirees and conservative investors faced the challenge of generating sufficient income in a near-zero interest-rate environment. Cash, term deposits and high-quality bonds often provided limited returns.

While rising yields can create short-term volatility in fixed-income markets, they also increase the income available from new investments.

As a result, diversified portfolios may once again be able to generate more meaningful levels of income from cash and fixed income, reducing reliance on capital growth from shares and property.

What investors should watch

Headline inflation is only part of the picture. The RBA is focused on underlying inflation and domestic capacity pressures, BIS researchers point to the persistence of services inflation, and IMF research highlights the role of energy prices and supply shocks.

Investors should therefore watch labour-market conditions, energy markets, inflation expectations and central-bank communications. Together, these will shape how quickly inflation returns to target and when interest rates might eventually be reduced.

US politics adds another layer of uncertainty. At the 3 November midterm elections, the Democrats won control of both the House of Representatives and the Senate, ending Republican control of Congress for the final two years of President Donald Trump's term. From January, the President will need bipartisan support to pass legislation, and his administration is likely to face closer congressional scrutiny, raising the risk of gridlock over budgets and government funding. Mr Trump retains his veto and broad executive powers over trade and foreign policy, so it is less clear how issues such as tariffs and the conflict with Iran will play out. US Treasury yields and the US dollar eased as the results came in, but a divided Washington makes the policy outlook for the world's largest economy harder to read.

The bigger question

The most important issue for investors is not whether interest rates rise once more, but whether the assumptions that shaped investment markets over the past three decades remain valid.

The era of falling inflation and steadily declining interest rates provided a powerful tailwind for asset prices. If inflation proves more persistent than expected and rates stay elevated, investors may need to rethink how their portfolios are built.

That could place greater emphasis on diversification, quality businesses with sustainable earnings, reliable income streams and assets capable of performing across a wider range of economic environments.

A fifth RBA rate rise this year, elevated oil prices and a renewed lift in inflation are a reminder that inflation risks have not disappeared, and that further tightening remains possible.

For borrowers, that may mean financing costs stay higher for longer than hoped. For investors, it points to a more complex and potentially more volatile environment in the near term.