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.

| More on:
A person sitting at a desk smiling and looking at a computer.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on Share Market News

Top ten gold trophy.
Share Gainers

Here are the top 10 ASX 200 shares today

ASX investors endured a sour end to the trading week today.

Read more »

Lion holding and screaming into a yellow loudspeaker on a blue background, symbolising an announcement from Liontown.

3 ASX shares that could walk away winners from the 'Future Made in Australia Act'

Life is a whole lot easier when money is being thrown your way.

Read more »

Two excited woman pointing out a bargain opportunity on a laptop.
Dividend Investing

With 8%+ dividends, how long can these ASX 200 passive income shares stay cheap?

I think ASX 200 investors looking for ‘cheap’ passive income shares will want to check these out.

Read more »

Broker looking at the share price on her laptop with green and red points in the background.
Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why Avita Medical, Cettire, Domino's Pizza, and Star shares are falling today

These ASX shares are having a tough end to the week. But why?

Read more »

A young woman holding her phone smiles broadly and looks excited, after receiving good news.
Share Gainers

Why Boral, FBR, Origin, and Regis Resources shares are pushing higher today

These ASX shares are ending the week positively. But why?

Read more »

a man in a hard hat and high visibility vest smiles as he stands in the foreground of heavy mining equipment on a mine site.
Broker Notes

Up 15% in 13 days, is it too late to buy South32 shares?

South32 shares have risen 1%-plus per day for the past 13 trading days. Have investors missed the boat?

Read more »

Animation of man and woman shaking hands on a deal on top of gold coins.
Mergers & Acquisitions

Which ASX companies are deploying dividends to secure a $1.9 billion deal?

Dividends appear to have sealed the deal for an ASX mega-merger.

Read more »