ASX 200 dips on RBA interest rate decision

The ASX 200 gave up some of its intraday gains following the latest RBA interest rate announcement. But why?

The S&P/ASX 200 Index (ASX: XJO) edged lower following on the interest rate announcement just released by the Reserve Bank of Australia (RBA).

The benchmark Aussie index was up 1.0% at 2:30pm AEST before slipping 0.1% in the minutes that followed. At time of writing the benchmark index remains up 0.9%.

ASX 200 investors took the news in stride after the RBA reported that, as widely expected, it was holding the cash rate steady at 4.35%. The interest rate paid on Exchange Settlement balances also remains unchanged at 4.25%.

Very few analysts were expecting Australia's central bank to cut interest rates today. But ASX 200 investors will be relieved the RBA didn't opt to hike rates, as some economists had been forecasting, to bring down ongoing inflationary pressures.

But after raising interest rates 13 times since it began tightening in May 2022, the RBA appears content to take a wait and see posture. At least for now.

Here's the latest.

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Image source: Getty Images

What ASX 200 investors learned from today's RBA interest rate call

Commenting on the decision that ASX 200 investors will be analysing this afternoon, the RBA board noted that inflation has come down "substantially" since peaking in 2022.

"Higher interest rates have been working to bring aggregate demand and supply closer towards balance," the board said.

However, ASX 200 investors didn't get that first rate cut today.

The RBA cautioned that "the pace of decline has slowed in the most recent data, with inflation still some way above the midpoint of the 2–3% target range".

Over the year to April, the monthly headline CPI indicator rose by 3.6%. Taking out volatile items and holiday travel, underlying inflation increased by a more worrisome 4.1%. That's in line with the inflation figures in December.

On the wages and labour front, the RBA reported:

Conditions in the labour market eased further over the past month 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.

Now what?

Unfortunately, ASX 200 investors will have to live with some uncertainty over the interest rate outlook over the medium-term.

"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 board cited persistent services price inflation as a key uncertainty. They added that while wages growth is easing, it remains high. The answer, it seems, is that we all need to work more productively.

"Productivity growth needs to pick up in a sustained way if inflation is to continue to decline," the board said.

"There also remains a high level of uncertainty about the overseas outlook," the board added.

So, when can ASX 200 investors finally expect the RBA to begin cutting interest rates?

Well, that vague and unsatisfying answer is "some time yet".

According to the RBA:

Inflation is easing but has been doing so more slowly than previously expected and it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range.

While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation.

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.

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