S&P/ASX 200 Index (ASX: XJO) shares lifted following some encouraging words on Australia's economic outlook from Reserve Bank of Australia (RBA) governor Philip Lowe this morning.
At the time of writing, ASX 200 shares are up 1.17%.
Though Lowe was clear the road ahead was not without difficulties.
Addressing the American Chamber of Commerce in Australia (AMCHAM), Lowe acknowledged that the global economy was facing challenging times. He added that most nations, Australia and the United States included, are witnessing their highest inflation rates in "many years".
This, he said, is seeing interest rates "rising around the world from the record lows during the pandemic", adding that officials find themselves in "a complex policy environment".
ASX 200 shares will need to prepare for higher rates
ASX 200 shares have struggled this year as inflation in Australia, and indeed much of the world, has come in higher than most economists had forecast. And it's still heating up.
Australian headline inflation came in at 5.1% for the March quarter, well above the RBA's 2% to 3% target range. Underlying inflation of 3.7% is also the highest level in many years.
"In both headline and underlying terms, inflation is much higher than we had earlier expected," Lowe said.
The central bank had earlier expected inflation would top out at 6%, but that's been revised upwards. "We are now expecting inflation to peak at around 7% in the December quarter. Following this, by early next year, we expect that inflation will begin to decline," Lowe said.
And it's not just ASX 200 shares that need to be ready for higher rates.
According to Lowe:
As we chart our way back to 2% to 3% inflation, Australians should be prepared for more interest rate increases. The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.
I want to emphasise though that we are not on a pre-set path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.
Australia's economic outlook remains strong
Lowe highlighted that the Aussie economy is heading into this period of high inflation and rising interest rates on a strong footing.
While ASX 200 shares are down 14% year-to-date, household spending remains strong, "with spending bouncing back following the Omicron setback," Lowe said.
Lowe continued:
Household balance sheets are generally in good shape, with households overall having accumulated more than $200 billion in additional savings during the pandemic. Furthermore, the current rate of saving out of income remains materially higher than it was before the pandemic, so there is a degree of flexibility in many household budgets.
It is also relevant that strong employment growth is continuing and that there are many job opportunities at the moment.
The RBA anticipates the recovery in spending on discretionary services, including travel, to continue. This should be good news for beaten-down ASX 200 travel shares.
As for an imminent recession, that doesn't appear to be on the cards.
"Although GDP growth had slowed in the March quarter, household consumption had been resilient and timely indicators pointed to solid growth in the June quarter," Lowe said.
"I don't see a recession on the horizon here," Lowe added during question time following his speech.
