S&P/ASX 200 Index (ASX: XJO) investors are keeping a close eye on the interest rate moves and signals from the Reserve Bank of Australia (RBA) this year.
And for good reason.
It was only back on 3 May, a touch over six months ago, that Australia's official cash rate stood at the all-time low of 0.10%. A historic low rate that RBA governor Philip Lowe had said in 2021 was likely to remain in place for several more years.
We know now that's far from the case.
Faced with fast-rising inflation, on 4 May the RBA raised interest rates by 0.25%, taking the cash rate to 0.35%. That was the central bank's first tightening move in more than a decade.
And the RBA has followed through with another hike every month since, taking us to the current 2.85%.
The rapid pace of tightening has hit ASX 200 shares hard. Year-to-date, the benchmark index is down 8.3%. That came after the ASX 200 posted an impressive 13% gain in 2021, when rates were at all-time lows.
Which brings us to the latest interest rate forecast from Goldman Sachs.
What to expect next from the RBA
There is broad consensus among leading economists that ASX 200 investors should expect at least some further interest rate increases from the RBA.
Of the big four ASX 200 banks, Commonwealth Bank of Australia (ASX: CBA) has the most dovish forecast, predicting rates will top out at 3.1%. Australia and New Zealand Banking Group Ltd (ASX: ANZ) believes the RBA will be forced to tighten further, taking the terminal interest rate to 3.85%.
However, the latest forecast from Goldman Sachs sees the RBA increasing rates five more times. Goldman believes rates will reach 4.1% in six months before declining modestly in 2024. That's likely a good bit higher than the market has currently priced in.
According to Goldman Sachs chief economist Andrew Boak (courtesy of The Australian Financial Review):
We do not expect the RBA will risk falling too far behind a synchronised global tightening cycle. All considered, we now expect plus 25 basis point rate hikes each month to May 2023 (inclusive) – to a terminal rate of 4.1 per cent (prior: 3.6 per cent) – followed by 110 basis points of easing over 2024 to 3 per cent.
In context, our revised terminal rate forecast sits around the hawkish extreme of peer economist expectations, but is broadly in line with pricing in financial markets. We see risks to our forecast in both directions.
How might ASX 200 shares react to a more hawkish RBA?
If Goldman Sachs has it right, some ASX 200 shares are likely to weather the rapid rate increases better than others.
Stocks that could come under further pressure would include those in the consumer discretionary sector. Higher rates will put further pressure on household budgets, leading to reduced discretionary spending.
ASX 200 shares holding a lot of debt may also find investors jumping ship, as the cost of servicing that debt marches higher than anticipated.
And growth stocks, valued with future earnings in mind, will face renewed headwinds if interest rates rise higher than investors have already priced in. The higher interest rates go, the dearer the cost of investing in those future earnings today.
On the flip side, ASX 200 companies with strong balance sheets should be able to weather any unexpectedly higher rates more easily.
Also, companies operating in sectors where they can pass on at least some of any increased operating costs from higher rates to their customers could outperform.
Then there are the ASX 200 energy shares.
With fossil fuel and lithium prices likely to remain elevated over the medium term, the big producers should be able to handle a more hawkish RBA, should rates indeed spike to 4.1%.
