S&P/ASX 200 Index (ASX: XJO) shares are marching higher on Monday, with the benchmark index up 0.77% in morning trade.
This comes as investors await the next interest rate decision from the Reserve Bank of Australia (RBA).
The RBA makes its announcement at 2:30pm AEST time tomorrow.
Image source: Getty Images
What's happening with rate hikes and ASX 200 shares?
In its ongoing battle to tame hot-running inflation, the RBA has raised the official cash rate at each of its past 10 meetings.
On 7 March, the central bank increased interest rates by another 0.25%, bringing the current official cash rate to 3.6%. That's up from the historic low of 0.1% when the bank first started tightening in May last year.
As last month's rate hike was widely expected, ASX 200 shares actually leapt 0.6% right after the RBA's announcement.
Tomorrow's price action will be interesting to watch, as the market is more divided on whether to expect another rate hike or if the time has come for a pause.
With inflation easing, consumer spending slipping, and a large number of home loans coming off ultra-low fixed rates, a number of economists believe the RBA will hold off with any further rate increases. That would likely see a relief rally in ASX 200 shares.
But there's far from a consensus agreement on that view. Inflation of 6.8% remains far above the RBA's 2% to 3% target range and unemployment levels remain at historic lows of 3.5%, which could force the RBA's hand.
With that in mind…
What the experts are saying
With ASX 200 shares potentially facing headwinds or tailwinds from tomorrow's RBA decision, we turn to Bloomberg's economist survey for some greater insight.
Of the 30 surveyed economists, 19 said they believe the RBA will hold fire tomorrow while 11 believe ASX 200 share investors should be prepared for another 0.25% rate hike.
This comes after both the US Federal Reserve and the European Central Bank opted to raise rates at their last meetings, despite the ongoing banking crisis. Notably, the Royal Bank of Canada went the other way and paused its tightening cycle at the last meeting.
Among the economists forecasting a pause is Gareth Aird, head of Australia economics at CBA.
"The domestic economy is now showing sufficient signs of slowing and we expect the RBA board will judge that a pause in the tightening cycle is the appropriate move," Aird said (quoted by Bloomberg). "The RBA does not want a recession."
But chief Australia economist at Goldman Sachs Andrew Boak begs to differ and forecasts a 0.25% increase is on the cards for tomorrow.
"Australian inflation is far too high, with clearer signs of an acceleration from persistent sources in the services sector," Boak said. He noted that the Fed has "continued to hike rates through a period of much more intense market volatility", and he expects the RBA to follow suit.
That gives you some idea of the immediate outlook for a rate hike or pause.
As for any rate cuts ahead that may help boost ASX 200 shares, most experts believe that's a good way off yet.
"The lagging nature of wages growth, another likely high minimum wage increase and upside risk to public sector wages following the change of government in NSW suggest that [a rate cut] is unlikely in 2023 or early 2024," said Su-Lin Ong at RBC Capital Markets (courtesy of The Australia Financial Review).
"We expect the RBA to delay policy easing to the third quarter of 2024 – by which time we expect trimmed mean inflation to have (finally) returned to the target band," Goldman's Boak added.
What do you think, Bernd?
As this economist is still awaiting the survey call from Bloomberg, I'm glad you asked!
I'm going to split the difference on this one. I believe ASX 200 share investors should expect a rate increase, but a small one.
My forecast is for the RBA to lift rates by 0.15%, bringing the official cash rate to 3.75%. Then perhaps next month we can look forward to a pause.
