Investing in ASX 200 shares? Here's what to expect from the RBA tomorrow

S&P/ASX 200 Index (ASX: XJO) investors will be keeping a close eye on the Reserve Bank of Australia (RBA) tomorrow afternoon.

At 2:30pm AEST RBA governor Philip Lowe will announce the central bank's next interest rate decision.

Last month, as you'll recall, the RBA opted to keep rates on hold at the current 3.6% to give it time to assess the impact of previous rate rises on inflation.

"The board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt," Lowe said at the time.

That came after the bank had hiked the official cash rate at 10 consecutive previous meetings from an all-time low of 0.10% last May.

The ASX 200 lifted 0.2% immediately following April's announcement.

Of course, that's all monetary policy water under the bridge.

The big question now is, what can ASX 200 investors expect from the RBA tomorrow?

Can ASX 200 investors expect another pause from the RBA?

For some expert insight into the question, we defer to the top economists at Australia's big four banks.

While they aren't unanimous in their outlook, three of the big four expect the RBA will hold fire again in May. This would likely offer some additional tailwinds for ASX 200 shares tomorrow afternoon.

The only big bank expecting a rate lift from the RBA tomorrow is Commonwealth Bank of Australia (ASX: CBA). CBA expects this will be the final increase we'll see from the central bank.

According to CBA head of Australian economics Gareth Aird (quoted by Savings.com):

We retain our call for the RBA to increase the cash rate by 25 basis points to 3.85% at the May Board meeting, our forecast for the peak in the cash rate. Money markets disagree with our view. As we go to press just 3 basis points are priced for the May Board meeting (i.e. a 12% chance of a 0.25% rate increase).

It is not the first time we have gone into a board meeting with a call not supported by the markets and undoubtedly it won't be the last.

CBA forecasts interest rates will fall to 2.85% by May 2024, which would be welcome news to mortgage holders and ASX 200 investors alike.

National Australia Bank Ltd (ASX: NAB) doesn't think the RBA will lift rates tomorrow, or at all in the mid-term future. NAB economists expect rates to remain at 3.60% before falling to 3.10% in May 2024.

"We further trimmed our rate expectations in the month, expecting the RBA to remain on hold until mid-2024, before rates are cut back towards neutral," NAB's economists said.

They added:

We acknowledge the risk of further rate rises remains – especially if inflation or wages surprise to the upside – but the slowing data flow is likely to make rate rises harder to justify as time goes on.

ANZ Group Holdings Ltd (ASX: ANZ) senior Economist Adelaide Timbrell also forecasts a dovish turn from the RBA.

"Trimmed mean inflation and the monthly CPI indicator were both lower than expected, supporting our view that the RBA will keep the cash rate at 3.6% in May," she said.

But Timbrell cautioned that a pause tomorrow doesn't indicate the end of the tightening cycle. ANZ expects rates to peak at 3.85% in August before falling back to 3.60% in November 2024:

Looking further ahead, though, persistently strong services inflation, reflecting excess demand in the economy, suggests that more RBA tightening will be needed in coming months.

If Timbrell is correct, that could flag some upcoming headwinds for ASX 200 shares.

Rounding off the list of big four banks, Westpac Banking Corp (ASX: WBC) is also forecasting a pause tomorrow, and the bank dropped its peak rate expectations. Westpac expects the official cash rate will be down to 2.35% by May 2025.

"We have always argued that May would likely be the peak of the tightening cycle so we are now lowering our forecast cash rate peak from 3.85% to 3.60%," Westpac chief economist Bill Evans said.

Evans added:

Given the uncertainty around the current outlook and a need to contain inflation expectations, the board is almost certain to maintain its clear tightening bias. However, as we move through the remainder of 2023 the credibility of that bias is likely to fade.

As for your fearless editor?

Thanks for asking!

I'm doubling down on my incorrect forecast for April. I now expect the RBA to lift rates by a modest 0.15% tomorrow before holding fire to assess the lagging impact of rate rises on inflation in June.

Should that eventuate, the ASX 200 might dip on the announcement, but I wouldn't expect any outsized moves.