The S&P/ASX 200 Index (ASX: XJO) is up 1.23% during afternoon trading on Tuesday.
The benchmark index dipped 0.2% at 11:30 AEST following the release of the Reserve Bank of Australia's minutes from its September monetary policy meeting.
But it looks like any angst the central bank may have caused ASX 200 shares investors regarding further rate rises has been offset by yesterday's strong performance in the United States markets.
Here are some of the key details from the RBA's minutes.
The inflation headache
The RBA board noted that timely indicators pointed to inflation remaining high and broadly based in the September quarter.
To date, the Australian Bureau of Statistics (ABS) has only provided inflation data on a quarterly basis, so the official data available today stems from the June quarter.
The ABS will start publishing a monthly CPI indicator in October. However, the RBA noted, "it could take some time for reliable trends to be discernible".
Adding to inflation pressures, the bank said, "Some retailers expected to apply further large increases in their prices in coming quarters, in part reflecting the pass-through of earlier rises in input costs."
While petrol prices fell in August, the RBA cautioned, "The expiration of the fuel excise cut would boost headline inflation in the December quarter."
Longer term, the bank's inflation expectations generally remain within its 2% to 3% target range.
Household spending supports ASX 200 retail shares
Helping support ASX 200 shares in the retail sector, the RBA noted that household spending in the September quarter to date remains solid, with retail sales increasing strongly in July.
Households have received some relief from rising rates and inflation through strong labour market conditions and income growth.
On the housing front the board noted:
Declines in housing prices had broadened out to most capital cities and regional areas, alongside weaker housing sales activity, rising interest rates and the expectation of further interest rate increases.
The bank expects mortgage interest payments to increase to around 4.5% of household disposable income over the coming months, and to almost 5% by the end of 2022.
Renters are still feeling the pinch as well, with vacancy rates falling across the capital cities.
The outlook for business investment
ASX 200 investors can take some heart from the RBA's positive outlook for business investment.
As reported in the minutes:
The June quarter ABS Capital Expenditure Survey, conducted in July and August, indicated that non-mining firms expected to increase investment in the 2022/23 financial year, driven by investment in machinery and equipment. Capacity utilisation remained high across industries, with non-mining capacity utilisation at its highest level in over three decades.
Now what for ASX 200 shares?
Higher rates have put a brake on the strong run ASX 200 shares enjoyed in the rebound from the pandemic sell-off. The high water mark for those rates will, inevitably, be determined by how sticky inflation gets.
The RBA's central forecast is for CPI inflation to be around 7.75% over 2022, "a little above" 4% over 2023, and around 3% over 2024.
As you're likely aware, the RBA opted to raise the official cash rate by 0.5% on 6 September, bringing the rate to 2.35%.
The board will announce its next rate decision on 4 October. While the September minutes don't reveal what size hike ASX 200 investors can expect, the members did say they expect to increase interest rates further over the months ahead.
The minutes note that further rate hikes are "not on a pre-set path given the uncertainties surrounding the outlook for inflation and growth".
Highlighting that uncertainty, the RBA said, "The board is seeking to return inflation to target while keeping the economy on an even keel. The path to achieving this balance remains a narrow one and clouded in uncertainty."
