S&P/ASX 200 Index (ASX: XJO) investors appear relieved by the Reserve Bank of Australia's latest interest rate decision.
As per normal, the RBA reported its decision at 2:30 pm AEDT.
Just before investors received that news, the ASX 200 was down 0.6% in intraday trade.
In the following minutes, the benchmark index leapt 0.4% to be down 0.2% at the time of writing.
As widely expected, the RBA board decided to keep Australia's official interest rate on hold today at 4.35%. That means the earliest possible rate relief for investors and mortgage holders alike won't come until at least February 2025, when the board next meets.
But with the RBA staying on hold and not taking the more extreme measure of raising interest rates to curb sticky underlying inflation, ASX 200 investors look to be in a stock-buying mood.
Here's why the RBA reached today's decision.
ASX 200 shoots higher on RBA interest rate call
The ASX 200 charged higher after the RBA board reported it would hold the cash rate at 4.35%. The interest rate paid on Exchange Settlement balances also remains unchanged at 4.25%.
The board noted that, "Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance."
However, underlying inflation, which excludes certain volatile items, remains around 3.5%. That's still above the 2.5% midpoint of the RBA's target range of 2% to 3%.
The board said it "is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain".
One of those risks is that ASX 200 investors will be facing elevated interest rates for longer.
"The most recent forecasts published in the November Statement on Monetary Policy do not see inflation returning sustainably to the midpoint of the target until 2026," the board stated.
Australia's labour market and wages growth count among the chief concerns that could keep inflation running hot.
According to the RBA:
A range of indicators suggest that labour market conditions remain tight; while those conditions have been easing gradually, some indicators have recently stabilised. The unemployment rate was 4.1% in October, up from 3.5% in late 2022.
That said, employment grew strongly over the three months to October, the participation rate remains close to record highs, vacancies are still relatively high and average hours worked have stabilised.
The board said wages grew by 3.5% over the year to the September quarter. That was a slower pace than in the June quarter, but labour productivity growth was said to "remain weak".
The RBA also expressed concern over the high level of uncertainty for the outlook abroad.
"Geopolitical uncertainties remain pronounced," the board said.
Noting that its monetary policy remains restrictive and is working as anticipated, the RBA nonetheless indicated ASX 200 investors could be waiting longer than hoped for the central bank to begin reducing interest rates.
According to the board:
While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high… It will be some time yet before inflation is sustainably in the target range and approaching the midpoint.
Commenting on when ASX 200 investors might finally see the RBA begin to pare back interest rates, eToro analyst Josh Gilbert advises patience.
According to Gilbert:
With October's retail sales data showing stronger-than-expected results and increased spending anticipated in the next two months, along with trimmed mean inflation (the RBA's main focus) rising slightly to 3.5% according to the October's CPI data, it may be more challenging for the RBA to justify a rate cut until the middle of 2025.
