RBA Message to Albanese: Interest Rate Hikes Likely in 2026

The Reserve Bank of Australia (RBA) may have left interest rates unchanged this week, but beneath the polite language and careful caveats, the governor delivered a far harsher message to Albanese. The warning was unmistakable: if inflation isn’t reined in, the RBA will do it themselves by raising interest rates.

What’s really going on with inflation?

Australia’s inflation problem is now fully exposed. Temporary electricity bill rebates masked underlying price pressures, and now the most recent quarter reveals a far more uncomfortable truth. Inflation is sticky, persistent, and drifting well outside the target the RBA is sworn to defend. For the first time in months, the Bank conceded that the risks have flipped and inflation, not growth or employment, is the main concern.

But here’s what the government won’t say out loud. Much of this inflationary persistence is self-inflicted. Over recent years, federal spending has surged, crowding and overheating large parts of the economy. The latest 2025–26 federal budget locks in structurally higher public expenditure and a return to deficit after two years of surpluses.

The numbers tell the story

In 24-25, the government ran a roughly A$10 billion deficit even as payments hit 26.2 per cent of GDP, the highest ratio in nearly four decades outside major crisis years. Looking ahead, the 25–26 Budget projects much heavier deficits, with structurally elevated spending across welfare, infrastructure, defence and household support.

This surge in public demand pours more money into the economy at a time when private-sector investment is only slowly recovering. That flood of cash, combined with tight supply (in housing, labour, services), feeds directly into prices and wages, deepening inflation.

RBA’s message to Canberra

So, on Tuesday, when the governor essentially told Canberra: “get inflation under control, or we will, and we will sacrifice the economy if we have to”, it wasn’t rhetorical. It was a threat, and it matters.

For everyday Australians, the message should be clear. Don’t assume the worst is over: Avoid taking on unnecessary debt and be cautious with speculative risks. If you borrow, borrow only for productive investment, because unless government spending is reined in, the RBA may bring out the hammer by lifting interest rates, and 2026 could become a year nobody forgets.

What were the best and worst-performing sectors last week?

The best-performing sectors included Materials, up 2.75 per cent, followed by Financials, up 1.69 per cent and Real Estate, up 0.85 per cent. The worst performing sectors included Information Technology, down 4.69 per cent, followed by Consumer Discretionary, down 1.33 per cent and Communication Services, down 1.27 per cent.

The best performing stocks in the ASX top 100 included Ramelius Resources, up 12.15 per cent, followed by Newmont Corporation, up 8.49 per cent and Pilbara Minerals, up 7.76 per cent. The worst-performing stocks included Life360, down 11.74 per cent, followed by Lynas Rare Earths, down 9.12 per cent and Telix Pharmaceuticals, down 7.36 per cent.

What's next for the Australian stock market?

Last week, the All-Ordinaries Index rose by just over half a per cent, with buyers firmly in control by Friday’s close. What made the move particularly encouraging was that the index finished the week right at the top of its weekly range. This kind of price behaviour typically signals underlying strength, and with December now past the halfway mark, the timing couldn’t be better.

If this is the start of the traditional Christmas rally, further upside should be expected, with the 9,100 level now clearly in focus. While a break to new all-time highs before year-end would still require a strong push and perhaps a little seasonal luck, it is no longer off the table. December has a habit of delivering surprises.

For investors who are not yet positioned, now is the time to prepare. December opportunities tend to move quickly, and those waiting for confirmation often find themselves chasing the market after the breakout has already occurred.

Looking beneath the surface, sector performance was mixed. Materials and Financials led the market with solid gains, while Information Technology lagged sharply, falling more than four per cent for the week. The Reserve Bank of Australia also held interest rates steady, and reinforced that rate hikes, rather than cuts, remain a possibility in 2026. Despite this, the All-Ordinaries rallied, which is a constructive signal that buyers remain willing to step in, even in the face of tighter policy risk.

Notably, the current strength is concentrated in Materials and Financials, which reinforces that it is very much a stock-picker’s market. A passive, broadly diversified approach may leave investors with a portfolio that underperforms significantly.

For now, the focus remains on whether buyers can maintain this momentum. The following two weeks will be critical, as the market sets the tone for the final stretch of 2025 and offers the first real clues about its intentions heading into 2026.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.

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