Default resolution blurry (incorrect scaling) after Tahoe 26.2 > 26.3.1 update. MBA m2 15

After updating to 26.3.1, the default resolution on my M2 MBA 15(1600x1036) looks scaled and text, graphics etc look blurry as a result. If I drop it to 1440x932, it looks sharp as it did before, but I now have less screen real estate. To me it's clearly a bug, but I don't know how to resolve this one.

I have shutdown/rebooted to no avail. This is a big problem for me, as I can no longer work like this.