S&P/ASX 200 Index (ASX: XJO) investors were rattled earlier this month by an interest rate hike that caught most analysts by surprise.
On 2 May, the Reserve Bank of Australia (RBA) opted to increase the official cash rate by another 0.25%. That sees the cash rate now at 3.85%, up from the record low 0.1% last May.
"Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range," RBA governor Philip Lowe said at the time.
The unexpected rate increase saw the ASX 200 tumble by 1% immediately following the announcement.
With the RBA's next rate decision on 6 June, should ASX 200 investors brace for yet another interest rate increase?
What can ASX 200 investors expect on 6 June?
While markets are still broadly pricing in a pause from the RBA in June, some leading economists aren't so sure.
The wages data for the March quarter, released by the Australian Bureau of Statistics (ABS) this morning, revealed the seasonally adjusted Wage Price Index (WPI) increased 0.8% over the quarter and 3.7% over the year.
The WPI measures changes in the price of labour.
The quarterly increase is slightly below the 0.9% forecast, while the annual increase is slightly higher than the 3.6% forecast. So, that's a bit of a mixed bag in determining whether the ASX 200 is likely to endure another rate hike in June or not.
However, minutes from the RBA's last meeting indicate the central bank maintains a hawkish stance. According to the minutes:
Members reaffirmed the board's determination to do what is required to bring inflation back to target, while emphasising that it is still seeking to traverse the narrow path.
Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve.
Can we all just be more productive, please?
One factor that could trigger higher inflation for longer is slow growth in productivity. That would likely mean ASX 200 investors could expect at least one, or several more rate increases.
If productivity ramps up, however, it will usher in economic growth and higher real wages without further spurring inflation.
As per the RBA minutes:
Members observed that the forecast for inflation to return to the top of the target band by mid-2025 was predicated on productivity growth returning to around the modest pace recorded prior to the pandemic.
Lowe also highlighted the need for productivity growth (courtesy of The Australian Financial Review):
That's the only way we can have faster growth in real wages. It's the only way to support the budget, where there are increased needs. And it's the way to improve our living standards.
Investing in ASX 200 shares? Here's what these experts expect from the RBA
Senior economist at Nomura Andrew Ticehurst said the RBA looks to be getting frustrated with the sluggish pace of the decline in inflation, which makes yet more rate increases likely.
According to Ticehurst (quoted by the Australian Financial Review):
We think we have witnessed a change in the RBA's reaction function over the past month or so; it is running out of patience, in our view, and might need to aim for a lower target end-point [for inflation].
Commenting prior to the release of today's wages data, National Australia Bank Ltd (ASX: NAB) head of market economics Tapas Strickland said any growth faster than forecast could see another rate increase in June.
Strickland said:
Key, according to these minutes, is whether there is evidence that productivity will pick up to ensure the wages growth forecasts contained in the May statement on monetary policy are consistent with the RBA's forecasts.
NAB remains comfortable with its call of the RBA lifting the cash rate to 4.1% by August, with the risk of a further hike to 4.35%.
With annual wages increasing slightly faster than forecast and quarterly wages growing slightly below forecast, ASX 200 investors may get a reprieve in June, though perhaps not in July or August.
As for when the ASX 200 may get some tailwinds from falling interest rates, you probably shouldn't hold your breath.
Australia and New Zealand Banking Group Ltd (ASX: ANZ) believes the RBA will hold fire in June and July, but forecasts one more rate hike in August.
"Easing remains some considerable time off," ANZ head of Australian economics Adam Boyton said.
