Things have gone from bad to worse for the S&P/ASX 200 Index (ASX: XJO) this Tuesday following the latest decision on interest rates from the Reserve Bank of Australia (RBA).
The ASX 200 was already having a pretty lacklustre time of it this session. By 2:30 pm, the index had dropped around 0.5%.
But when the RBA's latest interest rate move became public, investors started selling again. At present, the ASX 200 is nursing a 0.6% loss and is down to 7,580 points.
ASX 200 drops as RBA leaves interest rates at 4.35%
In a move most commentators expected, the RBA has left the cash rate unchanged at 4.35% at its February meeting – its first for the 2024 calendar year. It's the second month in a row that the RBA has left rates unchanged, following December's pause. That pause followed the last hike that Australians were subjected to. This occurred following the RBA's November meeting.
Some ASX 200 investors might have been hoping that today's RBA meeting would result in an interest rate cut. After all, we did see better-than-expected inflation numbers in December.
But in its statement today, the Bank arguably poured some old water on that sentiment. Here's some of what the Bank had to say on its decision today:
Inflation continued to ease in the December quarter. Despite this progress, inflation remains high at 4.1 per cent. Goods price inflation was lower than the RBA's November forecasts… Services price inflation, however, declined at a more gradual pace in line with the RBA's earlier forecasts and remains high. This is consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs.
Higher interest rates are working to establish a more sustainable balance between aggregate demand and supply in the economy. Accordingly, conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target…
While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks. The central forecasts are for inflation to return to the target range of 2–3 per cent in 2025, and to the midpoint in 2026…
While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out…
The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.
So if you've picked up a definite bias towards the notion that the next interest rate move could be higher rather than lower in this statement, you're probably not alone. This statement is arguably more hawkish than the one that followed the RBA's last decision in December.
This is probably what has spooked ASX 200 investors today. As we touched on earlier, the decision to leave rates at 4.35% was expected. But it's likely that the market wasn't expecting such a cautious tone from the RBA regarding its assessment of its next move.
It was only last week that we saw ASX 200 shares making new all-time highs, possibly due to euphoria over possible interest rate cuts in 2024. Today, that euphoria is nowhere to be seen.
