The Reserve Bank of Australia (RBA) has increased the interest rate by 25 basis points to 0.35%. S&P/ASX 200 Index (ASX: XJO) shares are already reacting.
Market commentators have been speculating whether the interest rate rise would happen this month or next month. The RBA took the plunge and increased rates today, signalling more increases were on the way.
RBA governor Philip Lowe said:
The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.
How are ASX 200 shares responding?
Changes to the RBA interest rate may have different impacts on the profit and loss, and valuations, of different businesses.
Banks are some of the biggest businesses in Australia and interest rates play a significant part in their margins.
Economists at the big four ASX banks were predicting that interest rates would start increasing this month or next month. However, there is a question of how much of the rate hike they will pass on and when.
At the time of writing, the Commonwealth Bank of Australia (ASX: CBA) share price is down 0.5% and the National Australia Bank Ltd (ASX: NAB) share price is down around 0.68%. The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is up slightly by 0.04%.
However, other banks have reacted differently. At the time of writing, the Westpac Banking Corp (ASX: WBC) share price is up 0.29% and the Macquarie Group Ltd (ASX: MQG) share price is up 0.34%, though it earns less of its net profit from Australia than the other big banks.
With all of the big banks scheduled to release a profit result/update in May, they may include some commentary regarding impacts on the net interest margin (NIM) as interest rates increase.
The biggest ASX 200 mining shares are all in the red.
The BHP Group Ltd (ASX: BHP) share price is down 0.77%, the Fortescue Metals Group Limited (ASX: FMG) share price is down a hefty 4.9%, and the Rio Tinto Limited (ASX: RIO) share price is down 1.66%.
Some of the biggest consumer-facing ASX 200 shares are also seeing movement today.
At the time of writing, the Wesfarmers Ltd (ASX: WES) share price is up 0.59% and the Woolworths Group Ltd (ASX: WOW) share price is up 0.43%. However, the Coles Group Ltd (ASX: COL) share price is down 0.4%.
Why did the RBA increase the interest rate?
Dr Lowe explained what's going on in the economy and why the RBA saw the need to react quickly:
The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.
Inflation has picked up significantly and by more than expected, although it remains lower than in most other advanced economies. Over the year to the March quarter, headline inflation was 5.1 per cent and in underlying terms inflation was 3.7 per cent…A further rise in inflation is expected in the near term.
