Is the outlook for ASX 200 shares in Q2 brighter since the RBA's interest rate decision?

The S&P/ASX 200 (ASX: XJO) is up 1.58% today as the benchmark index enjoys a second day in the sun.

The ASX 200 was in a happy place yesterday, delivering its best performance in more than two years. The ASX 200 closed 3.75% higher at 6,699.3 points.

This followed the Reserve Bank of Australia's decision to raise interest rates by 0.25% — not the 0.5% that the market and many economists anticipated.

So, what does this mean for ASX 200 shares as we move forward into the second quarter of FY23?

What will ASX 200 shares do in Q2?

So, to recap, Q1 was kinda dismal for the ASX 200. Over the first three months of FY23, the index fell 1%.

Investors were taken on a rollercoaster through reporting season. Good news from individual companies was dampened by broader worries about inflation, interest rates, and a potential United States recession.

Given the market elation over yesterday's lower rate rise, one must assume that RBA interest rate decisions are going to directly determine how the ASX 200 performs in Q2 FY23.

Over to the experts to explain what might happen.

Lower rate rise 'positive for the markets'

Shaw & Partners senior investment adviser James Nicolaou says the RBA's decision might signal that the other rate increases this year are "starting to have the desired effect".

And that's "positive for the markets and economy," he says in The Australian.

Betashares chief economist David Bassanese said:

Unlike the US Federal Reserve, the RBA is thinking twice about pushing the economy into a recession it might not need to have.

Also in The Australian, top broker Macquarie said a "bear market rally" may have already started following the "dovish" RBA increase and weak US ISM Manufacturing data.

Why did the RBA choose a lower rate rise?

There are going to be lots of opinions in the media today about why the RBA chose to go 0.25% this time around. Why don't we go straight to the horse's mouth for a clearer insight?

In a statement yesterday, RBA Governor Philip Lowe said:

The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.

So, sounds like the board is happy to slow things down for a bit after a series of more aggressive hikes. And that's going to be good for ASX 200 shares if yesterday's reaction is anything to go by.

Are this year's rate hikes working to curb inflation?

So, let's review. Interest rates began to rise in May this year with an initial 0.25% bump. It was the first rate rise since November 2010. Yeah. Major.

The RBA then bumped up rates by 0.5% every month until yesterday's 0.25% decision. So, the official cash rate is up 2.5% in six months.

The banks are largely passing on every hike in full to borrowers. So, on the average Australian mortgage of $600,000, borrowers are now paying more than $1,250 extra per month in interest. Eek.

You'd think that would be more than enough to disrupt most household budgets and cause a change in spending.

But we don't know the impact yet, as inflation continues to rise for now. There's a lag effect with these things.

Time will tell.