Have falling ASX 200 share prices spooked the RBA?

Is the RBA trying to engineer a soft landing for the economy and the ASX 200?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The ASX 200 gained 3.8% yesterday and is up 1.8% so far today
  • The RBA surprised markets with a smaller than expected 0.25% interest rate hike yesterday
  • The bank is looking to slow inflation without ushering in a recession and crashing the share market

The S&P/ASX 200 Index (ASX: XJO) is off to another cracking start today, up 1.8% in early trade.

This comes after blasting 3.8% higher yesterday.

If you were following the market moves, you'll have seen the ASX 200 was already posting one of its best days in years yesterday heading into the afternoon.

Then, at 2:30pm AEDT, the Reserve Bank of Australia (RBA) gave the markets a huge boost. Rather than announcing a 0.50% interest rate hike, as most analysts had forecast, the RBA took a dovish turn and lifted rates by a more modest 0.25%.

In response, the ASX 200 gained another 1.1% by the closing bell.

Which begs the question…

Did September's ASX 200 plunge spook the RBA?

The last two trading days have offered a welcome reprieve from what investors endured in September, when the ASX 200 dropped 7.3% over the month.

The fall was largely driven by fears that aggressive tightening from the RBA and other leading global central banks would lead Australia and other major economies into a recession.

And recessions, as you're surely aware, don't tend to be good news for equity markets.

So, is the RBA trying to engineer a soft landing for the economy and the ASX 200?

Here's what the experts are saying.

What the experts are saying

Vanguard's senior economist Alexis Gray points to the delicate trade-off the RBA is trying to balance.

According to Gray (quoted by The Australian Financial Review):

The RBA chose to slow the pace of rate hikes, acknowledging the bank's desire to return inflation to target while keeping the economy on an even keel. This hints at the inherent trade-off the RBA now faces to tame inflation without knocking the economy into recession.

Meantime, Mutual Limited's chief investment officer Scott Rundell said, "The cash rate is now back around neutral and given the risks of stalling growth, or worse, the bank seems comfortable with smaller rate hikes going forward."

And Peter Esho, an economist at Wealthi, added:

What we've seen today is the RBA sending a message that it's raising rates in a sensible way. Inflation is not the only problem. There is also a growing sense that financial stability is important.

If the RBA can indeed instil a sense of financial stability amongst skittish investors, the ASX 200 could shake off all the gloomy talk of an impending bear market.

Of course, by slowing the pace of rate hikes this month, the RBA may be setting the market up for more tightening in 2023.

Kicking the can down the road?

ANZ Head of Australian Economics David Plank believes ASX 200 investors should be prepared for some more interest rate hikes next year.

According to Plank (courtesy of The Australian):

We remain of the view, however, that the cash rate will need to move into clearly restrictive territory of more than 3% to ensure inflation does return to target. The slower pace of rate hikes now points to the tightening cycle extending into 2023.

Rate hikes into 2023 could throw up some fresh headwinds for ASX 200 investors.

But for now, investor sentiment has taken a decidedly bullish turn.

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.

More on Share Market News

A susccesful person kicks back and relaxes on a comfy chair
Best Shares

If I could only buy and hold a single ASX share forever, it would be this one

There are two reasons why this stock is my first choice...

Read more »

young woman reviewing financial reports at desk with multiple computer screens
Opinions

Brokers' verdict on 4 popular ASX 200 financial stocks

Financials outperformed every other sector in FY25. What should you do now with these 4 stocks?

Read more »

two colleagues high five each other as they sit side by side at a long desk in front of their laptop computers in an office environment.
Share Gainers

Why Bapcor, Ramelius, Sandfire, and WIA Gold shares are rising today

These shares are having a better day than most on Tuesday. But why?

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Share Market News

Is it too late to invest in the record setting S&P 500 stock gains?

A top broker reveals what to expect next from the surging S&P 500 Index.

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Share Fallers

Why Boss Energy, DroneShield, Greatland, and Viva Energy shares are tumbling today

Let's see why these shares are out of favour with investors on Tuesday.

Read more »

Man smiling at a laptop because of a rising share price.
Broker Notes

4 ASX shares to buy this week: experts

Looking for investment inspiration?

Read more »

Miner and company person analysing results of a mining company.
Energy Shares

Should you buy Boss Energy shares now after Monday's huge sell-off?

Macquarie gives its verdict on Boss Energy shares following Monday’s crash.

Read more »

Excited couple celebrating success while looking at smartphone.
Broker Notes

Macquarie forecasts 28% upside for this ASX All Ords stock

Let's see why the broker is feeling bullish about this name.

Read more »