Have falling ASX 200 share prices spooked the RBA?

Is the RBA trying to engineer a soft landing for the economy and the ASX 200?

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Key points

  • The ASX 200 gained 3.8% yesterday and is up 1.8% so far today
  • The RBA surprised markets with a smaller than expected 0.25% interest rate hike yesterday
  • The bank is looking to slow inflation without ushering in a recession and crashing the share market

The S&P/ASX 200 Index (ASX: XJO) is off to another cracking start today, up 1.8% in early trade.

This comes after blasting 3.8% higher yesterday.

If you were following the market moves, you'll have seen the ASX 200 was already posting one of its best days in years yesterday heading into the afternoon.

Then, at 2:30pm AEDT, the Reserve Bank of Australia (RBA) gave the markets a huge boost. Rather than announcing a 0.50% interest rate hike, as most analysts had forecast, the RBA took a dovish turn and lifted rates by a more modest 0.25%.

In response, the ASX 200 gained another 1.1% by the closing bell.

Which begs the question…

Did September's ASX 200 plunge spook the RBA?

The last two trading days have offered a welcome reprieve from what investors endured in September, when the ASX 200 dropped 7.3% over the month.

The fall was largely driven by fears that aggressive tightening from the RBA and other leading global central banks would lead Australia and other major economies into a recession.

And recessions, as you're surely aware, don't tend to be good news for equity markets.

So, is the RBA trying to engineer a soft landing for the economy and the ASX 200?

Here's what the experts are saying.

What the experts are saying

Vanguard's senior economist Alexis Gray points to the delicate trade-off the RBA is trying to balance.

According to Gray (quoted by The Australian Financial Review):

The RBA chose to slow the pace of rate hikes, acknowledging the bank's desire to return inflation to target while keeping the economy on an even keel. This hints at the inherent trade-off the RBA now faces to tame inflation without knocking the economy into recession.

Meantime, Mutual Limited's chief investment officer Scott Rundell said, "The cash rate is now back around neutral and given the risks of stalling growth, or worse, the bank seems comfortable with smaller rate hikes going forward."

And Peter Esho, an economist at Wealthi, added:

What we've seen today is the RBA sending a message that it's raising rates in a sensible way. Inflation is not the only problem. There is also a growing sense that financial stability is important.

If the RBA can indeed instil a sense of financial stability amongst skittish investors, the ASX 200 could shake off all the gloomy talk of an impending bear market.

Of course, by slowing the pace of rate hikes this month, the RBA may be setting the market up for more tightening in 2023.

Kicking the can down the road?

ANZ Head of Australian Economics David Plank believes ASX 200 investors should be prepared for some more interest rate hikes next year.

According to Plank (courtesy of The Australian):

We remain of the view, however, that the cash rate will need to move into clearly restrictive territory of more than 3% to ensure inflation does return to target. The slower pace of rate hikes now points to the tightening cycle extending into 2023.

Rate hikes into 2023 could throw up some fresh headwinds for ASX 200 investors.

But for now, investor sentiment has taken a decidedly bullish turn.

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.

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