The S&P/ASX 200 Index (ASX: XJO) was already enjoying a solid run today.
The benchmark index was up 1.0% at 2.30pm AEDT, despite a slide in US stock markets overnight.
Then the Reserve Bank of Australia (RBA) released its interest rate decision.
The RBA announced a 0.25% hike in interest rates, bringing the official cash rate to 2.85%. This was broadly in line with expectations, though the latest inflation data had an increasing number of analysts predicting a 0.50% increase.
Investors reacted by sending the ASX 200 up another 0.3% in the minutes following the release of the decision.
November marks the seventh consecutive month of interest rate hikes from the central bank.
It was only back on 3 May that interest rates still stood at a record low of 0.10%. The following day the RBA raised the rate by 0.25%, its first hike since November 2010. And in case you're wondering, in November 2010, the cash rate got boosted to a rather tight 4.75%.
Atop today's cash rate hike, the RBA board also increased the interest rate on Exchange Settlement balances by another 0.25%, taking that to 2.75%.
What did the RBA say about today's interest rate hike?
Australia is not alone in struggling with high inflation, RBA governor Philip Lowe pointed out. But it is too high.
"Over the year to September, the CPI inflation rate was 7.3%, the highest it has been in more than three decades," he said.
"Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role."
And getting back to the RBA's 2% to 3% target range for inflation will require "a more sustainable balance between demand and supply".
This would indicate ASX 200 investors should prepare to see the demand side of the equation take a greater hit over the months to come.
As for the Aussie economy, Lowe said it's "continuing to grow solidly" with national income "boosted by a record level of the terms of trade".
Next year, the RBA expects Australia's economic growth to moderate alongside the wider global economy. Economic growth will also be impacted as "the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions".
The RBA's central forecast for GDP growth was revised down, with the board now forecasting growth in 2022 of around 3.0%, with 1.5% expected in 2023 and 2024.
What about employment?
On the labour front, the unemployment rate of 3.5% remains at the lowest level in some 50 years. Wages are rising as well, though "lower than in many other advanced economies".
The RBA expects wages growth to pick up "due to the tight labour market and higher inflation".
If there's one thing ASX 200 investors don't care to hear, though, it's uncertainty. And there's a fair amount of that going around.
"One source of uncertainty is the outlook for the global economy, which has deteriorated over recent months," Lowe said.
The eventual impact on household spending in the higher rate environment is another uncertainty.
What can ASX 200 investors expect next
ASX 200 investors look to have largely baked a further rise in inflation into the equation.
According to Lowe:
A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8% later this year. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.
The RBA's central forecast for CPI inflation is around 4.75% in 2023 and then "a little above" 3% in 2024.
ASX 200 investors should also be aware this almost certainly won't be the last rate hike from the RBA.
Lowe continued:
The board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.
The size and timing of future interest rate increases will continue to be determined by the incoming data and the board's assessment of the outlook for inflation and the labour market.
The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.
