ASX 200 pares losses as RBA holds fire on interest rates. Now what?

The ASX 200 clawed back some of its earlier losses following this afternoon's RBA interest rate announcement.

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S&P/ASX 200 Index (ASX: XJO) investors were broadly prepared for today's decision by the Reserve Bank of Australia (RBA) to keep interest rates on hold following last month's somewhat unexpected 0.25% increase.

The November interest rate boost brought the number of rate hikes to 13 since the central bank began its tightening policy in May 2022 to combat soaring inflation. As you'll likely recall with some nostalgia, Australia's official cash rate stood at a rock bottom 0.10% at that time.

Today the RBA left Australia's official interest rate unchanged at 4.35% and the interest rate paid on Exchange Settlement balances unchanged at 4.25%.

Despite the move being widely expected, the ASX 200 edged higher on the news. The benchmark index was down 1.1% at 2:30pm AEDT when the RBA released its decision. In the minutes that followed, the benchmark index pared some of those losses to be down 0.8%.

Here's what the central bank just announced.

RBA keeps interest rates on hold…for now

Commenting on the board's ASX 200 boosting decision to hold interest rates steady, RBA governor Michele Bullock said, "Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy."

She noted that the impact of the more recent rate increases, including the 0.25% boost in November, "will continue to flow through the economy".

According to Bullock:

High inflation is weighing on people's real incomes and household consumption growth is weak, as is dwelling investment. Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market.

Bullock also pointed out that there has only been "limited information received on the domestic economy since the November meeting".

While medium-term inflation expectations have been consistent with the RBA's inflation target, ASX 200 investors will take note that she cautioned, "There are still significant uncertainties around the outlook."

Those uncertainties are especially prevalent around services price inflation, household consumption, the trajectory of the Chinese economy, and "the implications of the conflicts abroad".

What can ASX 200 investors expect now?

Looking ahead to what ASX 200 investors can expect from interest rates in 2024, Bullock said that potential further interest rate hikes "will depend upon the data and the evolving assessment of risks".

And she added the customary reminder that, "The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."

As for what market experts are forecasting, Bank of America said (quoted by The Australian Financial Review), "Further tightening is a risk if CPI prints stronger than expected in late January, but this is not our base case."

Russel Chesler, head of investments and capital markets at VanEck in Australia correctly forecasted today's pause. But he believes ASX 200 investors should position for another rate hike from the RBA in February.

"The next increase of 0.25% to 4.60% won't happen until February when the RBA has the benefit of additional data points, including quarterly inflation and wage growth," Chesler said.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. 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 positions in and has recommended Bank of America. 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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