The S&P/ASX 200 Index (ASX: XJO) is holding onto a 0.3% gain in early afternoon trade today as investors eye tomorrow's interest rate decision from the Reserve Bank of Australia (RBA).
That decision is due out on Tuesday at 2:30pm AEDT.
The current official cash rate has stood at 4.10% since 7 June. That's up from the historic low of 0.10% back in May 2022, when the RBA first began to rapidly ratchet up interest rates to get soaring inflation under control.
Inflation has come down from the late 2022 highs. But the most recent reading of 5.4% remains well above the central bank's target range of 2% to 3%.
So, will that see the RBA hike interest rates again tomorrow after hitting the pause button for the past four meetings?
Can ASX 200 investors expect the RBA to boost interest rates?
While the jury remains out, the vast majority of economists are forecasting the RBA will deliver a 0.25% interest rate hike tomorrow, bringing the official cash rate to 4.35%.
That could pressure the ASX 200, as market expectations on the RBA's next move remain mixed. According to the ASX's RBA Rate Indicator, market expectations of an interest rate increase tomorrow stood at only 50% as of Friday 3 November.
That's a far more optimistic view than the ones held by the lead economists at the big four ASX 200 banks, with all four expecting a rate hike from the central bank tomorrow.
Indeed, surveys conducted by both Bloomberg and The Australian Financial Review show most economists agree with those at the big banks. Thirty three of the 35 economists polled in the AFR survey expect newly appointed RBA governor Michele Bullock will announce an interest rate increase tomorrow.
And that might well not be the end of the tightening cycle ASX 200 investors need to contend with. Nine of the 35 economists said they are expecting two more increases, taking the official cash rate to 4.6%.
Simon Doyle, the local CEO of fund manager Schroders, agrees with that hawkish outlook.
"We think it's going to be very difficult for inflation to go back to 2% sustainably without more work from central banks," he said. "You could easily get another couple of rate hikes, another 50 basis points."
Josh Williamson, chief economist for Australia at Citigroup, also shares that view.
According to Williamson (courtesy of Bloomberg):
The board could even discuss a possible 50-basis-point hike, but we doubt this would be delivered given the degree of hiking to-date and the realpolitik…
Rates are not far enough above neutral to sufficiently restrain domestic demand growth at a time of high inflation. This will not be fixed by just one more 25 basis-point increase.
But as we said up top, the jury is still out on whether the RBA will increase interest rates tomorrow. And if the central bank does hold fire again, it could well spur a late afternoon rally on the ASX 200.
James McIntyre at Bloomberg Economics is among the minority forecasting another pause tomorrow.
"The RBA faces a difficult call," he said.
Inflation expectations are far more consequential and, if the RBA judges those remain intact despite the fuel-price boosted inflation read, then expect rates to remain on hold. That's how we think it will play out.