For a third consecutive month, the Reserve Bank of Australia (RBA), as expected, lifted the cash rate by 50 basis points today.
This brings the cash rate to 1.85% as the central bank tries to fight inflation, currently running at its highest level since the early 1990s.
The RBA is expecting inflation to peak later this year but doesn't expect it to fall towards the top end of its target range until 2024.
So much for inflation being transitory.
Somewhat counterintuitively, the ASX 200 took the increase in its stride, paring its losses to trade relatively flat on Tuesday.
Prior to today, market expectations were for the cash rate to peak at around 3.3% in March next year before edging lower later next year and early 2024.
Equity bulls are already salivating at the prospect of interest rate cuts, a possibility that helped send the ASX 200 almost 6% higher in July.
The 'central bank put' is back in play… even whilst interest rates are still rising. Once a bull, always a bull. Yes, I'm a signed-up, paying member of the club.
It seems I may not be alone, with Scott Haslem, chief investment officer at Crestone Wealth Management recently saying in the AFR that bond yields have just about peaked, something that "signals a respite for many long-duration equities, including quality tech exposures".
As if to emphasise the point, the S&P/ASX All Technology Index (ASX: XTX) moved sharply higher after the RBA decision.
Bears will point to a raft of challenges, including falling house prices, higher mortgage repayments, lower consumer confidence, lower corporate profitability, the prospect of higher inflation for longer, and the prospect of recession.
All this comes against a backdrop of the lowest unemployment rate for almost 50 years and the RBA's forecast of economic growth of over 3% in 2022, moderating to 1.75% in each of the following two years.
Close your eyes and look at the numbers and you'd be excused for assuming it's plain sailing ahead.
I'm not so naive to think everything is golden.
With household debt running at record levels, and with veteran bank analyst Jon Mott saying up to $250 billion of mortgages taken out in the last few years could be at risk of delinquency, there are clearly tougher times ahead.
Equity markets are forward-looking. As opposed to June — a truly horror month for many investors, particularly for small cap stocks — even in the face of today's RBA interest rate hike, markets are looking ahead to inflation peaking and to the day central banks get back to "the good old days" and start cutting interest rates again.
It won't be plain sailing. It won't be the COVID bounce we experienced in 2020. But neither will it be GFC II. The next bull market may already have begun.
