S&P/ASX 200 Index (ASX: XJO) shares, on average, have performed exceptionally well despite high interest rates and stubborn inflation. Indeed, the ASX 200 is up around 8% over the past 12 months.
At its last meeting on 18 June, the Reserve Bank of Australia opted to keep interest rates on hold at 4.35%. That level was reached after a series of 13 rate hikes commencing in May 2022 intended to tamp down runaway inflation.
Prior to the current tightening cycle, the official cash rate stood at the historic low of 0.10%.
While the RBA has achieved significant success in its inflationary battle, the final stretch to returning to the central bank's 2% to 3% target range is proving elusive.
We'll learn just how sticky inflation remains this Wednesday. That's when the Australian Bureau of Statistics (ABS) releases the June quarter consumer price index (CPI) data.
The RBA is forecasting that both headline inflation and underlying inflation (which strips out certain volatile items) will increase by 3.8% on an annual basis. Should inflation data come in much hotter than that forecast, ASX 200 investors could see the RBA lift interest rates when it meets again next Tuesday, 6 August.
Should we prepare for that now?
Here's what Australia and New Zealand Banking Group Ltd (ASX: ANZ) is forecasting.
What is ANZ expecting from inflation and interest rates?
ANZ economist Adam Boyton expects inflation down under will come in at 3.9%, slightly above the RBA forecast of 3.8%.
According to Boyton (courtesy of The Australian Financial Review)
We wouldn't expect an inflation result in line with our forecasts of 3.9% year-on-year for both [headline and underlying] measures to result in RBA tightening, especially given the move higher in the unemployment rate over the past year, sustained weak GDP growth, low levels of consumer confidence and deteriorating business conditions.
Which isn't to say ASX 200 investors are entirely out of the interest rate hike woods just yet.
Boyton added:
As to what number might cause the RBA to tighten, there is no automatic outcome. But a 4.1% year-on-year on trimmed mean and headline would be an uncomfortable outcome and present the RBA board, and us, with a difficult judgement call.
That's a pretty tight margin there, folks!
What are other analysts forecasting
Josh Gilbert, market analyst at eToro, doesn't believe the ASX 200 will get hit with an interest rate lift next Tuesday.
Commenting on Wednesday's inflation print, Gilbert said, "This quarter's CPI reading is the make-or-break moment ahead of the RBA's August rate decision. It's fair to say this is the most important data point Australia has received all year."
As for a rate hike, Gilbert added, "Economically, Australia is unlikely to break rank with the UK and US without a much more compelling reason than some uptick in quarterly inflation."
KPMG senior economist Michael Malakellis, however, believes an interest rate hike could well be on the cards next week.
"A headline CPI figure over 4% will most likely trigger a rate rise, unless the trimmed mean stays flat or ticks down," he said (quoted by the AFR).
Malakellis added:
The RBA will be very concerned about falling behind the curve in fighting inflation. It took a calculated risk in not raising rates as aggressively as other countries but will be alert to the dangers of allowing inflation to resume an upward trend or to become entrenched.
The cumulative risks related to continued strength in the labour market, unexpected resilience in household consumption and fiscal policy that includes tax cuts and temporary cost of living relief make this period particularly difficult for the RBA.
Stay tuned!
