The S&P/ASX 200 Index (ASX: XJO) spent most of today in the red.
At 2:30pm AEDT, the benchmark Aussie index was down 0.5%.
As you're likely aware, that's when the Reserve Bank of Australia (RBA) reported on its latest interest rate decision, delivering a most welcome cut.
Despite that news, the ASX 200 actually dipped 0.1% in the minutes that followed to be down 0.6% for the day. It's since recovered from that dip and is currently down 0.5% once more.
Here's what's happening.
ASX 200 flounders on RBA interest rate call
ASX 200 investors and mortgage holders alike just received the first interest rate cut delivered by the RBA since the central bank reduced the official cash rate to 0.10% in November 2020.
Australia's official cash rate had been stuck at 4.35% since November 2023.
Until now.
As widely expected, the RBA decided to lower the cash rate target by 0.25% to the new 4.10%. The interest rate paid on Exchange Settlement balances was cut to 4.0%.
The board noted that the December quarter underlying inflation was 3.2%. They said this "suggests inflationary pressures are easing a little more quickly than expected".
The RBA also pointed to ongoing subdued growth in private demand and said wage pressures have eased.
These factors have increased the board's confidence that inflation is moving sustainably towards the midpoint of the central bank's 2% to 3% target range.
But ASX 200 investors appear to be reacting cautiously to the interest rate cut, with the board stating that upside risks remain.
"Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought," the RBA said.
Adding that the central forecast for underlying inflation has been revised up a little over 2026, the board looks to have taken some of the wind out of the market's sails, stating, "While today's policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing."
Atop "notable uncertainties about the outlook for domestic economic activity and inflation", the RBA also flagged uncertainties abroad, which is also likely dampening any more positive response on the ASX 200 today.
"Uncertainty about the outlook abroad also remains significant," the board said.
The members added:
Most central banks have been easing monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets. But market expectations for further easing have moderated somewhat in recent months, particularly in the United States.
Now what?
Looking at what ASX 200 investors might expect from interest rates in the year ahead, the RBA noted:
The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range. In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook.
Commenting on that outlook, CreditorWatch chief economist Ivan Colhoun said, "It's likely the governor will signal at her upcoming press conference that the war on inflation is not yet won, and as such a significant interest rate reduction cycle should not be expected at this time."
Stay tuned!
