S&P/ASX 200 Index (ASX: XJO) investors pining for another interest rate cut were disappointed on 4 November.
Though few were surprised when the Reserve Bank of Australia (RBA) opted to keep Australia's official cash rate on hold at 3.60% at its last meeting.
With inflation ticking higher rather than lower over the September quarter, the ASX 200 actually lifted following the news that interest rates were staying steady. That was likely due to concerns prior to the meeting that the RBA might have taken the hawkish move to raise rates.
Since the RBA's 4 November announcement, investors have also learned that Australia's unemployment rate in October declined to 4.3%, down from 4.5%. This could further push out any rate cuts.
Now, here's what the RBA's just released minutes tell us.
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RBA minutes cast light on interest rate path
The RBA board noted that central banks in the United States, Canada, and New Zealand had cut rates at their October meetings, with New Zealand cutting by a full 0.50%.
However, in their decision to leave interest rates in Australia on hold, the board said that both Canada and New Zealand expected inflation to decline to their targets over the period ahead, while the US Fed was responding to weaker labour market conditions.
As for Australia, the RBA minutes state:
Members noted that Australian financial conditions had eased over the course of the year as the cash rate had been reduced. Cuts in the cash rate had been passed through to banks' funding costs and lending rates.
Growth in housing prices and housing credit had picked up. This was most notable for housing credit to investors, which tends to be more responsive to interest rate cuts than housing credit to owner-occupiers. Business debt had continued to grow strongly.
And rising inflation was the nail in the coffin for ASX 200 investors pining for an interest rate cut.
The RBA said that the outcomes for both headline and underlying inflation were "significantly higher" than had been forecast in August. Both headline and trimmed mean inflation came in at or above 3%, the upper end of the central bank's target range.
At the time of the meeting, economic indicators showed rising unemployment, which could help trigger a rate cut.
"Recent data pointed to a further, and slightly faster-than-expected, easing in labour market conditions," the minutes state.
But the ABS labour report on 13 November showed an unexpected reversal of those easing labour market conditions.
Citing broad global and domestic uncertainty, the RBA concluded:
The board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.
ASX 200 investors shouldn't hold their breath
Much as mortgage holders and ASX 200 investors would like to see the RBA deliver an interest rate cut in December, eToro market analyst Farhan Badami believes those odds are sky-high.
According to Badami:
The RBA's goal of getting inflation under control is going to take longer than anticipated, with the board likely needing to keep its foot on the brake for longer, putting rate-sensitive sectors under pressure.
Badami added, "For now, the chance of a Christmas miracle cut for borrowers is near non-existent, and rates are likely to stay on hold until the board gets a clearer sign that inflation is trending lower."
Stay tuned!
