ASX 200 charges higher as investors celebrate RBA interest rate decision

Investors sent the ASX 200 sharply higher following the RBA's interest rate announcement.

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The S&P/ASX 200 Index (ASX: XJO) was up 0.3% when the clock struck 2:30pm AEST.

That's when the Reserve Bank of Australia (RBA) announced its interest rate call for August.

In the minutes that followed the release of that announcement, the ASX 200 leapt 0.5% to be up 0.8% for the day at the time of writing.

Investor sentiment took an optimistic turn after the RBA board announced that it would not be raising interest rates this month.

That leaves Australia's official cash rate at 4.10% and the interest rate on Exchange Settlement balances at 4.0%.

This is now the third pause in rate hikes from the central bank since it began a series of 12 increases in May 2022 to combat runaway inflation. While only 15 months ago, it almost seems like a different era when Australia's official cash rate stood at a rock bottom 0.10%.

But with a confirmed pause this month, the ASX 200 is lifting off amid investor hopes we may have seen the last rate increases in the current cycle.

Why did the RBA hold fire on another rate increase?

Explaining the decision for another pause in the RBA's rate hikes, outgoing governor Philip Lowe said, "The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so."

He said the August pause will give the central bank more time "to assess the impact of the increase in interest rates to date and the economic outlook".

However, we're not necessarily out of the woods yet.

ASX 200 investors should take note that Lowe indicated, "Inflation in Australia is declining but is still too high at 6%."

Goods inflation is coming down, but rents and many services prices are still on the rise.

Wages growth is picking up due to tight labour markets hit with high inflation. But Lowe said, "Wages growth is still consistent with the inflation target, provided that productivity growth picks up."

The RBA is forecasting CPI inflation to keep falling to around 3.25% by the end of 2024, and then back within its 2% to 3% target range by late 2025.

"The Australian economy is experiencing a period of below-trend growth, and this is expected to continue for a while," Lowe added.

The RBA is forecasting GDP growth of around 1.75% in 2024 and slightly over 2% in 2025.

What can ASX 200 investors expect now?

Should inflation remain sticky, ASX 200 investors can expect at least one more rate hike from the central bank.

"Returning inflation to target within a reasonable timeframe remains the board's priority," Lowe said.

Lowe again cautioned on the dangers of enduring inflation:

If high inflation were to become entrenched in people's expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment…

Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.

Only time will tell if inflation falls quickly enough to ensure we've seen the last rate hike from the RBA in the current tightening cycle.

For now, however, the ASX 200 is celebrating the August reprieve.

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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