The S&P/ASX 200 Index (ASX: XJO) is soaring higher on the heels of this afternoon's interest rate announcement from the Reserve Bank of Australia (RBA).
The benchmark Aussie index was up 0.8% at 2:30pm AEST. In the minutes that followed, the index rocketed up another 0.5% to currently be up 1.3% for the day.
This came after the RBA reported that it was holding Australia's official interest rate steady at 4.35%. The interest rate paid on Exchange Settlement balances was also unchanged at 4.25%.
The gains posted by the ASX 200 are somewhat muted as the pause was widely priced into the markets. Though analysts have been upping the odds of a potential rate hike from RBA amid sticky inflation.
While the rapid series of 13 rate hikes instituted by the central bank since May 2022 has brought inflation down from the near 8% levels witnessed at the end of 2022, we're not out of the woods quite yet.
Here's what's happening.
RBA interest rate announcement boosts ASX 200 shares
Commenting on the decision to keep rates on hold that looks to be buoying ASX 200 investor sentiment, the RBA board noted that while data shows inflation Down Under continues to moderate, it's not coming down as fast as the RBA had been forecasting.
The consumer price index (CPI) increased 3.6% over the year to the March quarter. That's down 4.1% from the increase recorded over the year to December. But it remains above the RBA's target range of 2% to 3%.
Of potential concern for ASX 200 investors awaiting a rate cut, the board highlighted that underlying inflation was higher than headline inflation and declined by less. This was largely driven by services inflation, which the board says "remains high and is moderating only gradually".
While higher interest rates have been working, the RBA said there's continuing excess demand in Australia's economy.
As for the labour market and wages, the board said:
Conditions in the labour market have eased over the past year but remain tighter than is consistent with sustained full employment and inflation at target. Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth.
What can investors expect ahead for interest rates?
Whether ASX 200 investors can expect interest rates to rise, fall or remain steady over the rest of the year remains highly uncertain.
"The economic outlook remains uncertain and recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth," the RBA said.
The RBA's central forecasts are for inflation to return to its 2% to 3% target range in the second half of 2025 and to the midpoint of that range in 2026.
The enduring services inflation was flagged as a key uncertainty. The board expects services inflation to ease more slowly than it previously forecast.
And, in case ASX 200 investors want any more uncertainty, the board added:
There also remains a high level of uncertainty about the overseas outlook. While there has been improvement in the outlook for the Chinese and US economies, and many global commodity prices have picked up, geopolitical uncertainties, including those related to the conflicts in the Middle East and Ukraine, remain elevated.
Reiterating the RBA's resolution to return inflation to its target range, the board cautioned it believes it will be "some time yet" before this happens. The members added they "will remain vigilant to upside risks".
So, could the ASX 200 be hit with another rate hike ahead?
Maybe.
According to the board:
The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.
Invest accordingly.
