CANBERRA, 25 February 2026 – Global financial markets remain in a state of cautious observation this week as central banks, led by the U.S. Federal Reserve and the Reserve Bank of Australia (RBA), signal a “wait-and-see” approach to interest rate adjustments. Despite a moderation in headline inflation figures, policymakers warn that the path to a stable 2% target remains fraught with structural challenges.
Federal Reserve Holds Steady Amid Mixed Signals
In the United States, the Federal Open Market Committee (FOMC) recently voted 10-2 to maintain interest rates at a range of 3.50% to 3.75%. This pause follows a series of three consecutive quarter-point cuts in late 2025. Federal Reserve officials, including Chicago Fed President Austan Goolsbee and Boston Fed President Susan Collins, have indicated that while further cuts may be appropriate if inflation continues to fall, the current economic climate requires vigilance.
Recent data shows U.S. inflation slowed to 2.4% in January. However, “sticky” costs in sectors such as energy and rent continue to pressure household budgets. Fed officials have noted that the 2% target has not been consistently met in nearly four years, leading to a cautious stance on further monetary easing before the second half of 2026.
The Australian Context: RBA and Global Pressures
Closer to home, the Reserve Bank of Australia has been navigating a “complete rollercoaster” of global economic conditions. Following a cash rate cut to 3.85% in mid-2025, the RBA has more recently opted to hold rates steady at 3.60% to combat persistent domestic price pressures. Governor Michele Bullock has expressed concern over trade uncertainties and the potential for global market volatility to impact the local economy.
Understanding the Drivers: Cost-Push vs. Demand-Pull
The current inflationary environment is a complex blend of two primary economic forces. Understanding these is critical for investors and consumers alike as they navigate the 2026 fiscal landscape.
| Feature | Demand-Pull Inflation | Cost-Push Inflation |
|---|---|---|
| Primary Cause | Aggregate demand exceeds the economy’s production capacity. | Increase in production costs or decrease in aggregate supply. |
| Common Triggers | Increased consumer spending, government stimulus, or low interest rates. | Rising resource prices (e.g., energy), higher wages, or supply chain disruptions. |
| Market Effect | “Too much money chasing too few goods.” | Companies pass higher input costs onto consumers to maintain margins. |
| Current 2026 Context | Moderating as consumer confidence shows only modest improvement. | Persistent in energy and rent sectors despite overall cooling. |
Public Sentiment and Consumer Confidence
While official data suggests inflation is moderating, public perception remains wary. Recent insights indicate that “consumer concern persists even as actual inflation moderates.” In the U.S., consumer confidence saw a slight uptick in February after a significant drop in January, yet the “affordability debate” remains a central theme in public discourse.
For private lenders and investors, the current environment poses unique risks. High inflation continues to threaten the purchasing power of fixed interest payments, making long-term serviced loans less valuable over time. Meanwhile, the “wealthy” demographic has shown signs of souring on the economy as inflation-adjusted gross domestic product growth slowed in the final quarter of 2025.
Frequently Asked Questions
Why hasn’t the Fed cut rates further in early 2026?
Although inflation has dropped to approximately 2.4%, Fed officials are waiting for more definitive evidence that it will reach and stay at the 2% target. Concerns over a “slower and bumpier” progress path have led to a pause in the rate-cutting cycle that began in 2025.
What is the difference between the 2023 inflation spike and today?
The 2023 spike was largely driven by post-pandemic supply chain shocks and rapid demand recovery. In 2026, while those shocks have subsided, inflation is being sustained by structural issues in housing (rent) and energy, alongside a cautious labour market.
How does inflation affect my mortgage?
High inflation typically leads central banks to maintain higher interest rates. While some mortgage borrowers have taken actions to dampen the impact of higher rates on monthly payments, sustained high rates generally increase the cost of borrowing and reduce household disposable income.