ASX 200 falls following ninth consecutive RBA interest rate hike

With inflation still running high, the RBA increased the official cash rate by another 0.25%, bringing the interest rate to 3.35%.

Key points
  • The RBA lifted interest rates by 0.25%, the central bank’s ninth consecutive hike
  • ASX 200 shares dropped 0.7% immediately following the RBA’s announcement
  • Governor Philip Lowe said the RBA “will do what is necessary” to return inflation to within the 2% to 3% target range

The S&P/ASX 200 Index (ASX: XJO) has slipped into the red amid the Reserved Bank of Australia (RBA) handing down another interest rate rise. At the time of writing, the index is 0.54% lower at just below 7,500 points.

The ASX 200 was up more than 0.2% during lunchtime trading. The benchmark index also proved resilient earlier in the day, despite a retrace in US markets overnight.

Then, at 2:30pm AEDT, the RBA released its interest rate decision following a meeting of its board.

The central bank announced another 0.25% increase in interest rates, bringing the official cash rate to 3.35%. This was broadly in line with consensus expectations, as the RBA continues to dampen stubbornly high inflation.

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 3.25%.

In the minutes following the announcement, the ASX 200 tumbled more than 0.6%.

February marks the ninth consecutive interest rate hike from the central bank. (The board does not meet in January.)

The first of those hikes came on 3 May last year, when the official cash rate was at a rock bottom 0.10%. At that time, the interest rate had not been lifted since November 2010.

A man sits uncomfortably at his laptop computer in an outdoor location at a table with trees in the background as he clutches the back of his neck with a wincing look on his face.

Image source: Getty Images

What did the RBA announce post its meeting?

RBA governor Philip Lowe explained the board's decision to hike rates yet again following the meeting, saying, "Global inflation remains very high."

Lowe acknowledged that inflation pressures are easing somewhat, with lower energy prices and the impact of higher rates.

However, the ASX 200 is under pressure after he added, "It will be some time, though, before inflation is back to target rates. The outlook for the global economy remains subdued, with below-average growth expected this year and next."

CPI inflation over the year to the December quarter came in at 7.8%, the highest level since 1990. And Lowe also noted that underlying inflation of 6.9% "was higher than expected".

"Global factors explain much of this high inflation," he said. "But strong domestic demand is adding to the inflationary pressures in a number of areas of the economy."

The RBA forecasts CPI inflation will continue to ease this year to 4.75%. By mid-2025, the central bank expects inflation will be hovering at "around 3%", right at the top of its target range.

As for the broader economy, Lowe said the board expects GDP growth will slow to around 1.5% during 2023 and 2024.

The labour market remains an area of concern in the bank's inflation battle. The unemployment rate of 3.5% is the lowest since 1974.

"Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead," Lowe said.

What's ahead for ASX 200 investors?

ASX 200 investors should expect at least one more interest rate hike to come. Perhaps more.

Lowe reiterated the RBA's priority of bringing inflation back to its 2% to 3% target range.

According to Lowe:

High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people's expectations, it would be very costly to reduce later.

He said the RBA would seek to keep "the economy on an even keel, but the path to achieving a soft landing remains a narrow one".

Also likely pressuring ASX 200 shares today was Lowe's reminder that more rate hikes are likely on the horizon:

The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.

As in previous statements, he added that the board "will do what is necessary to achieve that".

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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