February 2026 Market Update

As we say goodbye to the summer holiday period, 2026 has begun with some encouraging economic momentum. However, this strength is increasingly being tempered by persistent inflation pressures, global uncertainty, and a clear shift in monetary policy.

Australia’s labour market delivered a positive surprise in December, with unemployment falling to 4.1%. Job vacancies increased and household spending continued to grow, highlighting the resilience of domestic economic conditions.

That resilience, however, has also contributed to persistently high inflation. In a higher-than-expected outcome, the Consumer Price Index rose 3.8% over the 12 months to December, up on the November result and exceeding forecasts from both economists and the Reserve Bank of Australia.

In response to these inflationary pressures, the RBA lifted the official cash rate, reinforcing its commitment to returning inflation to target. The decision marked a clear shift towards tighter financial conditions, with the Bank signalling that it remains prepared to act further should inflation prove more stubborn than expected.

As a result, market participants and commentators are now pricing in at least two—and potentially three—additional interest rate increases over the course of the year.

Currency markets reflected these dynamics. The Australian dollar remained firm, ending January at US$0.70. Since the inauguration of US President Donald Trump, the Australian dollar has gained 11.4%, while the US dollar has declined 11.2% over the same period, providing additional support to the local currency.

Equity markets delivered moderate gains. The S&P/ASX 200 rose 1.8% in January, closing the month at 8,869. While this represents a solid start to the year, the market remains below its peak reached in October, reflecting ongoing investor caution amid rising rates.

Consumer confidence softened in response to higher borrowing costs and cost‑of‑living pressures. The Westpac–Melbourne Institute Consumer Sentiment Index slipped 1.7% in January, falling from 94.5 to 92.9 in December, suggesting households remain cautious as interest rates move higher.