Inflation, Interest Rates and an Uncertain Outlook
Global markets continue to navigate a complicated environment. The Iran war has disrupted energy markets, inflation remains above central bank targets, and interest rates have moved higher in both Australia and the United States. Meanwhile, share and property markets are adjusting to the prospect that borrowing costs may remain elevated for longer.
Periods like this can feel unsettling. However, investment markets regularly encounter geopolitical events, changing economic conditions and short-term volatility. For long-term investors, the focus should remain on portfolio quality, diversification and alignment with personal financial goals.
The Iran war and oil prices
The Iran conflict remains a source of uncertainty, particularly because the Strait of Hormuz is a major route for Middle Eastern energy exports. Disruption to oil production, shipping and related infrastructure has contributed to higher and more volatile oil prices.
For Australian households, the most visible impact is usually higher petrol and diesel prices. Australia imports much of its refined fuel, leaving local prices exposed to disruptions across the Asia-Pacific supply chain. Higher transport costs can also flow through to food, freight and other everyday expenses.
Oil is therefore important not only as a commodity, but also because sustained price increases can keep inflation higher and complicate decisions by central banks.
Inflation and interest rates in Australia
Australia’s annual headline inflation rate was 3.5% in July, while underlying inflation was 3.6%. Both remained above the Reserve Bank of Australia’s 2% to 3% target range.
On 29 September, the Reserve Bank of Australia increased the cash rate by 0.25 percentage points, from 4.35% to 4.60%. This was the fourth increase during 2026 and took the cash rate to its highest level since late 2011. The Board also indicated that it remained prepared to raise rates further if necessary to control inflation.
Higher interest rates work by discouraging borrowing and encouraging saving. They also increase mortgage repayments for many households, leaving less money available for retail spending, travel and other discretionary purchases. This may place pressure on the earnings of consumer-facing companies and businesses with significant debt.
For investors, higher rates can have mixed effects. Banks and some income-producing investments may benefit from higher interest income, while heavily indebted companies and interest-rate-sensitive sectors can come under pressure. Higher cash and term deposit rates also create greater competition for investment capital because investors can earn more from defensive assets without taking share-market risk.
Global share markets remain resilient
Despite higher interest rates and geopolitical uncertainty, global share markets have remained comparatively resilient.
Continued earnings growth and investment in artificial intelligence have supported major international companies. However, a relatively small group of large businesses has accounted for a substantial share of recent market performance. This concentration means investors should be cautious about relying too heavily on one market, sector or investment theme.
The outlook will depend partly on whether inflation can moderate without a sharp slowdown in economic growth. Easing inflation could eventually allow interest rates to fall, supporting bonds, shares and property. Persistent inflation could instead keep rates higher, increasing the risk of softer company earnings and further market volatility.
The Australian share market
Australia’s recent company reporting season produced unusually large share-price movements. Results were judged not only on current profits, but also on whether company outlooks met already-established market expectations.
Australian companies face higher energy, wage and financing costs, while mortgage pressure is making households more cautious. Businesses with strong balance sheets, dependable cash flows and pricing power may be better placed to manage these conditions.
Investors should nevertheless prepare for more modest and uneven Australian market returns over the next 12 to 18 months. Morgan Stanley has reported weakening earnings momentum and emerging downgrades across the forward outlook, with higher rates placing particular pressure on domestically exposed companies.
This does not necessarily mean returns will be negative. It means the strong gains of recent years may be more difficult to repeat, making diversification and disciplined investment selection increasingly important.
Australian property markets
Higher mortgage rates are also affecting Australian housing. National dwelling values fell by 1.1% in September, the sixth consecutive monthly decline, leaving values 3.6% below their March peak. Most capital cities recorded falls during the month.
Higher repayments reduce borrowing capacity, while weaker consumer confidence can cause prospective buyers to delay purchasing decisions. Properties may take longer to sell and buyers may gain more negotiating power. However, population growth, rental demand and limited housing supply may continue to support selected markets over the longer term.
Maintaining perspective
Uncertainty is an unavoidable part of investing. Maintaining suitable cash reserves, controlling debt and holding a diversified portfolio remain important foundations of a sound financial strategy.
If higher interest rates, market movements or changing household expenses have affected your circumstances, speak with your HMH adviser about whether your financial plan remains aligned with your goals.
This article contains general information only and does not take into account your objectives, financial situation or needs.