Interest Rates in 2026: What Matters for Fixed Income Investors

What Will Interest Rates Do in 2026?

Twelve months ago, if you’d told investors that interest rates would still be sitting at 3.6% at the start of 2026, most would have dismissed you as a pessimist. If you’d suggested the RBA might actually raise rates again, they’d have thought you were mad.

Yet here we are.

Rate cuts aren’t just delayed, they’re off the table entirely. And, for the first time in years, the conversation around fixed income has completely changed. Here’s why.

Why interest rate cuts are no longer guaranteed in 2026

For much of the past year, financial markets assumed rate cuts were inevitable. That confidence evaporated in December when Reserve Bank governor Michele Bullock said cuts weren’t “on the horizon for the foreseeable future”.

But the real story isn’t what she said, it’s why the RBA’s calculus has fundamentally changed. Four factors have shifted the conversation from when rates would be cut to if they’d be cut at all.

1. Progress on inflation has slowed.

Between October 2022 and July 2023, the RBA lifted interest rates aggressively in an effort to curb surging inflation, which peaked at 7.8% in December 2022. As inflationary pressures began to ease, it then began cutting them, reducing the cash rate from 4.35% to 3.6% in the six months between February and August 2025.

Since then, however, progress on inflation seems to have stalled.  While the Consumer Price Index was as low as 1.9% in June last year (which led to a 0.25% cut in August 2025), by October it was back at 3.8% – well outside of the RBA’s target range of 2%-3%.

While inflation has since moderated from this high (it was back to 3.4% in November 2025), this volatility has reinforced the Bank’s concern about declaring victory too early.

2. House prices keep rising

Housing has been one the major contributors to inflation over 2025. Over the 12 months to 31 December, the national median dwelling price increased by around 8.6% – with the pace of change peaking in the September quarter.

From a monetary policy perspective, this creates a dilemma. If the RBA were to cut rates further, it would likely bring down the cost of borrowing and further stimulate housing demand. Without a drastic change in economic conditions or a corresponding increase in housing supply this would almost push prices in Australia’s already expensive housing market even higher.

3. The labour market remains too tight

Unemployment and inflation are often considered to have an “inverse” relationship. In other words, if unemployment is low, inflation is high as employees can command higher wages. If unemployment is high, inflation is low because employers have greater bargaining power.

Australia’s unemployment figures have been remarkably stable over 2025, with the latest ABS data showing an economy-wide unemployment rate of 4.3% – compared with a long-term average of close to 6.5%. Some sectors, including construction and aged care, are suffering from acute labour shortages.

4. Global economic conditions look uncertain 

As we start 2026, the global economic backdrop has become more complicated.

Growth across major economies has been uneven, the US bond market has been surprisingly volatile (you can read about why that matters here), and increased geopolitical instability brings the possibility of supply line disruption and higher costs.

For a small, open economy like Australia’s, these external factors limit the ability to move policy quickly or decisively without risking renewed inflationary pressures – strengthening the case for taking a conservative approach to rate cutting.

How “higher-for-longer” interest rates impact Australian households 

For many households, the most immediate effect of interest rates staying high will be on borrowing costs – especially as high mortgage repayments leave less income for discretionary spending. But even for those without mortgage debt, higher rates can influence behaviour by dampening confidence and encouraging saving over spending.

Over time, this can bring significant flow-on effects. With less money being spent on “non-essential” items like clothing, eating out and holidays, the whole economy begins to slow and the price of goods of service (as well as assets) naturally begins to stall or even come down.

How “higher for longer” interest rates impact investors

When interest rates are higher, borrowing to invest also becomes more expensive. This tends to cool property markets and reduce speculative activity. Share prices can become more volatile as investors reassess how much risk they’re willing to take, particularly if cash and term deposits start offering more competitive returns.

Investors’ focuses also often change. In low-rate environments, many portfolios tend to concentrate on capital growth, especially as earning income can be challenging. This can lead investors to gravitate towards higher risk assets such as shares.

When rates are high, income can become more important as investment-focused assets – like cash and fixed interest – often generate better returns.

Why fixed income matters more in a higher-for-longer interest rate environment

When interest rates are low and predictable, fixed income can sometimes fade into the background of many investors’ minds. (Not that it should). But when interest rates are higher and less certain, that dynamic should change.

1. Fixed income starts paying real income againIn a low interest rate environment, one of the biggest challenges for investors becomes generating income without taking on excessive risk. That’s because bond yields tend to be low and cash returns can struggle to keep pace with inflation.Higher interest rates alter this equation. Bonds and other fixed income investments begin to offer meaningful, regular income that doesn’t rely on rising asset prices.In simple terms, fixed income starts doing what it says on the tin.
2. Income matters more when markets are uncertainWhen higher interest rates are the result of the kind of volatility or uncertainty we’re seeing today, it becomes much riskier to rely solely on rising asset value to grow your portfolio. Share prices can move sharply in either direction, and property markets can cool quickly when borrowing becomes expensive.Fixed income provides a different experience. Even when prices fluctuate, income is paid on a contractual basis, not as a result of profits, dividends or rents. For many investors, knowing where at least part of their return is coming from makes them less reliant on timing the market.
3. Fixed income helps balance portfolios when risk is repricedHigher interest rates tend to make investors more selective. Borrowing costs rise, speculative activity slows and markets become less forgiving of weak fundamentals.In this environment, fixed income can play an important balancing role. It tends to behave differently from shares and property, helping smooth portfolio performance when growth assets become volatile.
4. Higher interest rates restore the role of diversificationIn 2021, with rates at 0.1%, Australian property soared 23.7% and the ASX climbed 17.7%. Everything went up together. In 2022, with rates rising sharply, the ASX fell 3% – but property still rose 8.1%.That divergence tells you everything you need to know about why 2026 won’t look like the last five years. When rates stay higher for longer, different assets stop moving in lockstep. And that changes what matters in a portfolio.Fixed income provides an investment with low correlation to either the ASX or residential property market – and one that often benefits from, rather than being negatively impacted by, higher borrowing costs.

Interest rates and fixed income: What we’re watching in 2026

As 2026 gets under way, our focus will be less on the exact timing of interest rate cuts (or increases) and more on understanding how the current conditions shape income, risk and portfolio outcomes.

In environments like this, markets tend to adjust based on forecasts and underlying data – which means asset prices rise and fall well before any interest rate policy changes are confirmed.

That means investors who wait to see exactly what happens before making a decision often find themselves reacting to, and losing, any benefit they hoped to obtain.

Instead of trying to time the market, what matters is balance, diversification and, in the face of global uncertainty, certainty of returns. From our perspective, this is exactly where fixed income reasserts its role.

After all, most investors still think of fixed income as the boring bit of their portfolio – the safety net you tolerate while waiting for growth assets to do the heavy lifting. That view might be easier to justify when rates were near zero but it doesn’t make sense anymore.

In fact, if you’re still approaching fixed income that way in 2026, you’re probably leaving returns on the table.