The S&P/ASX 200 Index (ASX: XJO) dropped almost 1% after the Reserve Bank of Australia (RBA) hiked interest rates on Tuesday.
While analysts had been cautioning investors that another RBA rate hike was increasingly likely, judging by the reaction on the ASX 200, many investors had been banking on a pause.
The latest increase – the 12th from the RBA since May 2022 – sees the official cash rate at 4.1%.
One of the main concerns expressed by RBA governor Philip Lowe is that high levels of wage increases will drive inflation amid low productivity growth.
According to Lowe, "the upside risks to the inflation outlook have increased".
"Unit labour costs are also rising briskly, with productivity growth remaining subdued," he said.
Which brings us to why ASX 200 investors shouldn't be surprised by the next RBA rate hike.
Will the ASX 200 price in another RBA rate hike?
How the ASX 200 reacts the next time the RBA lifts interest rates depends on investor expectations.
Following on the latest wages and productivity report from the Australian Bureau of Statistics (ABS), most analysts' expectations of yet another rate hike have rocketed.
According to the ABS, Australian gross domestic product (GDP) increased by a lowly 0.2% in the March quarter, below consensus expectations of a 0.3% increase. GDP increased by 2.3% compared to March quarter in 2022.
"This is the sixth straight rise in quarterly GDP but the slowest growth since the COVID-19 Delta lockdowns in September quarter 2021," ABS head of national accounts Katherine Keenan said.
The ABS reported compensation of employees increased 2.4% in the March quarter on the back of a 2% increase in the December quarter, underpinned by a tight labour market.
And, as The Australian Financial Review reports, it's this data that has Goldman Sachs and Capital Economics cautioning that ASX 200 investors should expect the RBA to hike rates to 4.85% before the central bank will have inflation under control.
According to Capital Economics economist Abhijit Surya, the labour market report indicates productivity has probably weakened even more this quarter.
"That in turn will prop up unit labour cost growth and keep services inflation stubbornly high," Surya said.
Indeed, the average output per hour worked declined 0.3% in March and is down 4.5% over the past year. This equates to higher unit labour costs, which translate to higher prices.
The low productivity won't please Lowe either. He said on Tuesday that ongoing strong unit labour cost growth would prevent inflation from falling.
Meaning the latest data from the ABS has seen the odds of the ASX 200 weathering another rate hike rocket.
According to Lowe:
The best way to achieve a moderation in growth in unit labour costs is through stronger productivity growth, which would also underpin durable increases in real wages and our national wealth and make more resources available to fund the public services that people value.
RBC chief economist Sun-Lin Ong also believes ASX 200 investors will see at least one more rate hike from the RBA, as reported in The Australian.
"We had not expected that large an acceleration in annual unit labour costs," Ong said.
"Accordingly, policy needs to move into more restrictive territory and there is upside risk to our 4.35% terminal forecast."
