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 are the best and worst-performing sectors this week?

The best-performing sectors include Materials, up over half a per cent, followed by Financials, slightly up under half a per cent and Real Estate, slightly down under half a per cent. The worst-performing sectors include Information Technology, down over 4 per cent; Healthcare, down over 2 per cent; and Industrials, down over 1.5 per cent.

The best performing stocks in the ASX top 100 include Pilbara Minerals, up over 8 per cent, followed by Ramelius Resources, up over 7 per cent and Medibank Private, up over 3 per cent. The worst-performing stocks include Life360, down over 11 per cent, followed by Lynas Rare Earths, down over 10 per cent and Telix Pharmaceuticals, down over 7 per cent.

What's next for the Australian stock market?

This week, the All-Ordinaries Index edged 0.5 per cent lower by Thursday, but what makes this week particularly interesting is not the size of the move; it’s the lack of volatility. For the second week in a row, the index has tightened into a narrow range, and historically, when weekly volatility contracts like this, it usually signals a much larger move ahead.

The last time we saw this exact pattern was in mid-September, when the All-Ordinaries moved sideways for three straight weeks before breaking sharply higher in October and surging to a new all-time high. That’s why now is the time to be on high alert, as something big is building.

To anticipate what comes next, two key levels matter. A break below 8,860 opens the door to a deeper retest of support, while a break above 8,950 hands control back to the bulls and sets up a classic Christmas rally toward the all-time high.

If you are not already preparing for that move, now is the time to do so. December opportunities tend to go quickly, and you do not want to start planning after the breakout has already begun.

Zooming in, sector performance was mixed. Materials and Financials delivered modest gains, while Information Technology was hit hard, dropping more than 4 per cent for the week. The Reserve Bank of Australia also held interest rates steady, signalling that rate hikes, not cuts, remain possible in 2026. This kind of quiet, sideways price action is precisely what you would expect when markets are in a cautious, wait-and-see mode.

For now, all eyes should remain on the lower boundary at 8,860 points. Whichever side breaks first, 8,860 or 8,950, will set the tone for the final stretch of 2025 and reveal the market’s 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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