ASX 200 shares lift as RBA says recession not on the horizon

Australians can expect more interest rate hikes this year, but the economy looks to be strong enough to power ahead.

| More on:
A ship captain looking through a pair of binoculars.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX 200 shares lift following RBA governor’s speech
  • Inflation is expected to peak at 7% this year with more interest rate hikes ahead
  • Aussie households accumulated some $200 billion in additional savings during the pandemic

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.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A group of happy office workers throw papers in the air and cheer after seeing the Latrobe Magnesium price skyrocket 38%
Share Market News

Here are the top 10 ASX 200 shares today

These ASX 200 shares outperformed all others on Thursday.

Read more »

Three male athletes sprint on an athletics track with the sun low on the horizon behind them representing the race between ASX lithium shares to outperform
Share Market News

Here are the 3 most heavily traded ASX 200 shares on Thursday

Our most traded ASX 200 share today is down by more than 5%.

Read more »

Bear market
Share Market News

Here’s why one big bad bear is suggesting the stock market could crash by 50%

One strategist thinks markets haven't bottomed.

Read more »

Investor sitting in front of multiple screens watching share prices
Share Market News

5 things to watch on the ASX 200 on Thursday

Here's what to expect on the ASX 200 on Thursday...

Read more »

A trendy woman wearing sunglasses is making it rain, spraying cash on that bargain.
Share Market News

Here are the top 10 ASX 200 shares today

It was a great day on the market for these ASX 200 shares.

Read more »

An office worker and his desk covered in yellow post-it notes
Share Market News

Here are the 3 most heavily traded ASX 200 shares on Wednesday

Guess which ASX 200 sector is dominating the market's volume charts today.

Read more »

Business woman watching stocks and trends while thinking
Share Market News

5 things to watch on the ASX 200 on Wednesday

It will be another busy day on the ASX 200 on Wednesday...

Read more »

Two couples having fun racing electric dodgem cars around a track
Share Market News

Here are the top 10 ASX 200 shares today

These 10 ASX 200 shares outperformed all others on Tuesday.

Read more »