Macro regime shift: From monetary to fiscal dominance

Despite renewed tariff tensions between the US and China, credit market volatility, and the longest US government shutdown in history, equity markets are at record highs and credit spreads remain tight.

- Kellie Wood head of fixed income Schroders Australia

The global macroeconomic environment is shifting. Central banks have been relegated to supporting roles, with fiscal policy now the key to macroeconomic outcomes. Governments are now more actively directing capital toward their priorities at the same time we are seeing a major a surge in public debt, driven by post-COVID 19 stimulus and ongoing geopolitical tensions. As a result, economies must now grow faster than interest rates to ensure debt sustainability.

That is not to say that central banks are not in play. They are, but have had to grapple with a more complex landscape. Controlling inflation is now constrained by the need to avoid triggering debt crises or undermining fiscal priorities, which has led to a structural change in interest rate dynamics.

"Higher for longer" is now a reflection of elevated real yields (see chart below). For investors, this means that fixed income is once again offering compensation for both inflation and duration risk, making it a more desirable asset class than it has been in the past decade.

In Australia, the easing cycle appears to have run its course. Inflation remains elevated, particularly in services, and the labour market continues to show strength. Weak productivity and rising unit labour costs suggest that a modestly restrictive policy stance is appropriate. We do not expect a further rate cut in December and see the RBA maintaining a cautious approach in 2026 keeping rates higher for longer.