Why ASX 200 investors hoping for an RBA interest rate cut may be waiting until 2025

The RBA will announce its next rate decision and inflation outlook tomorrow afternoon.

Blue % sign with white dollar signs.

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

Buying S&P/ASX 200 Index (ASX: XJO) shares and hoping for Reserve Bank of Australia (RBA) interest rate cuts in 2024?

You're not alone!

It's hard to believe that less than two years ago, in early May 2022, the official RBA interest rate stood at a rock bottom 0.10%. And over the prior months, some analysts were even forecasting that Australia's central bank could join its European counterparts and delve into negative interest rates.

How that would have turned out, we'll never know.

What we do know is that the massive fiscal and monetary stimulus measures pushed through during the COVID pandemic scare stoked what had been labelled 'stubbornly low' inflation levels. Inflation down under topped out at a blistering 7.8% in December 2022.

To combat that suddenly resurgent inflation, commencing in May 2022, the RBA hiked interest rates at 10 consecutive monthly meetings.

With three more rate increases over the next eight months, Australia's official cash rate reached the current 4.35% on 8 November.

The question ASX 200 investors are asking now is, when can the market expect the central bank to begin easing?

Might the next RBA interest rate cut not come until 2025?

Under the new reporting schedule, RBA governor Michele Bullock will announce the bank's next interest rate decision tomorrow at 2:30pm AEST.

Now only a few optimistic investors are expecting the central bank to cut rates this month.

According to the ASX interest rate indicator, 95% of investors expect the bank to hold rates at 4.35%.

But the market continues to expect one or more RBA interest rate cuts in 2024.

Expectations are high for a 0.25% cut in September, with many investors also pricing in a second reduction in December bringing the official cash rate to 3.85% heading into 2025.

But not everyone is looking through the same rose-coloured glasses.

HSBC chief economist Paul Bloxham believes ASX 200 investors awaiting interest rate relief will need to be patient and await 2025.

According to Bloxham (quoted by The Australian Financial Review):

Although the RBA is patiently seeking to bring inflation down gradually, so as to maintain as close to full employment as possible, fiscal policymakers may not be so patient given the electoral cycle.

Personal income tax cuts are already locked in for July 1, but more spending is a risk in the May budget, with both likely to support inflation, at a time when it is already above target.

Then there's the blistering Aussie housing market.

"We see the RBA as unlikely to want to cut rates when the housing market is so tight and housing prices are rising solidly, for fear of pump-priming and driving a further housing price boom," Bloxham said.

Keep your eyes on the horizon

We may see the first RBA interest rate cut in September, and perhaps a second cut in December.

Or we may need to await 2025 for some rate relief.

Either way, ASX 200 investors will do well to keep one eye on the horizon and the other eye peeled for quality companies operating in growing markets that may have been unduly oversold due to market angst over sticky inflation.

As legendary investor Warren Buffett famously advised, "Embrace what's boring, think long-term, and ignore the ups-and-downs."

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

Man looking concerned head in hands at laptop
Share Market News

Worried about an ASX stock market crash? Here are 5 reasons AMP says the bull market has legs

Despite the potential for a pullback, the ASX bull can keep on running, says AMP.

Read more »

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.
Dividend Investing

Is Telstra stock a smart buy right now for dividends?

Would I buy Telstra shares for that hefty dividend yield today?

Read more »

Opinions

1 top ASX growth stock to buy that's down 40%

Here’s why I think this stock could fly higher.

Read more »

Business woman watching stocks and trends while thinking
Share Market News

5 things to watch on the ASX 200 on Wednesday

Here's what to expect on the ASX 200 today.

Read more »

property prices represented by person holding on to miniature house
Share Market News

Shares vs. property: Record stock ownership amid landlords' exit

Household wealth derived from owning shares just hit a record $1.4 trillion.

Read more »

A man wearing a red jacket and mountain hiking clothes stands at the top of a mountain peak and looks out over countless mountain ranges.
Share Gainers

Here are the top 10 ASX 200 shares today

It was mayhem on the markets today, with one of the worst days in a long time for ASX shares.

Read more »

A businesswoman pulls her glasses down in shock to look at the bad news on her computer.
Share Market News

The Aussie stock market just wiped out all of 2024's gains! Time to buy?

We're back to the start for 2024 after another negative session. Is there a way for investors to make the…

Read more »

Person handing out $50 notes, symbolising ex-dividend date.
Share Market News

Insiders are buying Mesoblast and these ASX shares

Insiders seem to see value in these shares.

Read more »