S&P/ASX 200 Index (ASX: XJO) investors have been waiting a long time for the Reserve Bank of Australia (RBA) to cut interest rates.
The last reduction to Australia's official cash rate came in November 2020. Worried about deflation and the economic impacts of the global pandemic, that day saw the RBA cut interest rates by 0.25%, which brought the cash rate down to 0.10%.
The cash rate remained at that historic low until May 2022.
With inflation suddenly soaring, the RBA then began a rapid tightening cycle. The last increase in November 2023 brought the benchmark interest rate to the current 4.35%.
The ASX 200 has weathered those increases surprisingly well. Yet stocks have gone backwards with nearly every rate hike announcement while lifting with almost every pause in the tightening cycle.
With history as our guide, ASX 200 investors will likely send the market march higher once the central bank begins easing.
Many investors were disappointed when that didn't happen in February. And according to the RBA interest rate indicator, 10% are still expecting that to happen when the RBA board meets again on 19 March.
(Those expectations may be higher now, following a higher-than-expected increase in unemployment. Thursday's data revealed the Aussie jobless level increased to 4.1% in January. That's up from 3.9% and the highest in two years.)
How long will ASX 200 investors have to wait for interest rates to come down?
While interest rates went up by the elevator, it's likely they'll take the stairs on the way down.
According to RBA governor Michele Bullock, "Our view, and it's reflected in our forecasts, is that inflation is being persistent. But we are seeing it come down and back in the band in 2025."
A large part of that persistent inflation (which just a few years ago was 'stubbornly absent') stems from the lagging increases in services costs. Those service cost increases are also lagging behind the slowing inflation we're seeing across most market sectors.
With all this in mind, economists at the Commonwealth Bank of Australia (ASX: CBA) are pencilling in the first RBA rate cut in September.
While that might seem a long way off, CommBank CEO Matt Comyn cautions that ASX 200 investors may not see any interest rate relief until 2025 (courtesy of The Australian Financial Review).
That's partly due to the sticky inflation in the United States. US inflation came in at an annual rate of 3.1% in January, above consensus expectations of 2.9%.
Citing "persistent" inflation, Comyn said of CBA's September base case for rate cuts that "there is certainly a possibility that could be delayed" until 2025.
According to Comyn:
[Rate cuts] will be data-driven and, clearly, inflation coming down should be the highest priority. There is some uncertainty about exactly when rates will come down and what the pace of the reductions might be.
Foolish takeaway
There's clearly a lot of uncertainty in the air.
While that can be disconcerting, there's one thing we can be (almost) certain of.
Interest rates will come back down.
That may happen as early as March. Or it may not happen until September or even not until 2025.
In the meantime, I suggest using any shorter-term market retrace as an opportunity to look at adding more high-quality ASX 200 shares to your investment portfolio.
