Interest rates could stay higher for longer. Australia, New Zealand show why

What a difference a few months make. At the start of this year, investors were betting the Fed would reduce rates by as much as 1.5 percentage points this year. By the beginning of this week, markets were pricing in roughly half the amount of monetary easing.

As Deutsche Bank pointed out in a report published on Monday, “this continues a theme over the last couple of years, whereby investors have repeatedly been too quick to price in a dovish pivot”. It also raises deeper questions about whether the most aggressive tightening campaign in decades is well and truly over.

Wage growth in Australia accelerated last quarter, rising 4.2 per cent on an annualised basis, the fastest pace since 2009. The RBA expects core, or underlying, inflation to return to the midpoint of its target band only in 2026, underscoring the stickiness of prices and the need for policy to remain restrictive for a while longer.

Adrian Orr, the RBNZ’s governor, warned investors not to jump the gun. “As soon as people think you might have done enough, the next guessing game is when are you going to start cutting,” he said.

His comments are spot on and encapsulate the difficulties central banks face in signalling shifts in policy. Just as markets are prone to reading too much into hints from policymakers, central bankers themselves need to be more careful about what they say and how they say it.

Even in the euro zone, whose economy is much weaker, unemployment stands at a record low while core inflation is proving sticky, mainly because of wage pressures. Bank of America says “such low unemployment across the board, regardless of anything else – strong growth in the US, weak growth in the euro zone – is a puzzle.”

Investors deserve most of the blame for the