ASX 200 lifts off as RBA raises interest rates yet again

With inflation still running hot, the RBA has increased the benchmark interest rate by another 0.25%, bringing the official cash rate to 3.6%.

A man sits wide-eyed at a desk with a laptop open and holds one hand to his forehead with an extremely worried look on his face as he reads news of the Bitcoin price falling today on his mobile phone

Image source: Getty Images

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 RBA has lifted interest rates by another 0.25%, the central bank’s tenth consecutive hike
  • ASX 200 shares leapt higher immediately following the RBA’s announcement
  • Governor Philip Lowe said it will be “some time” before inflation falls back within the bank’s target range

The S&P/ASX 200 Index (ASX: XJO) had barely regained its early day losses by 2:30pm AEDT to trade just about flat.

Then the Reserve Bank of Australia (RBA) released its latest interest rate decision.

The RBA board announced another 0.25% increase in interest rates, bringing the official cash rate to 3.6%.

Atop today's cash rate hike, the RBA board also increased the interest rate on Exchange Settlement balances by another 0.25%, taking that to 3.5%.

The move was widely expected as inflation in Australia remains well above the central bank's 2% to 3% target range.

Perhaps because investors were well prepared for another rate increase, the ASX 200 soared 0.6% immediately following the announcement.

March now marks the tenth consecutive interest rate hike from the central bank.

Rather amazingly, it was only on the morning of 3 May last year that Australia's official rates were at the historic low of 0.1%. That afternoon saw the first rate hike from the RBA since November 2010.

Why did the RBA increase interest rates again?

Explaining why the board opted to raise interest rates yet again, RBA governor Philip Lowe noted that global inflation remains "very high".

ASX 200 investors hoping that may turn around quickly will be disappointed by Lowe's assessment. "It will be some time before inflation is back to target rates," he said.

But the ASX 200 looks to be getting a boost from the report that inflation in Australia has at last peaked.

"The monthly CPI indicator suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia," Lowe said.

Rents and services price inflation remain high.

The Aussie economy continues to grow but at a slower pace. GDP increased 0.5% in the December quarter and 2.7% over the year.

While employment dipped in January, the unemployment rate remains near 50-year lows. However, Lowe said, "As economic growth slows, unemployment is expected to increase."

For now, wages are continuing to increase amid high inflation and a tight labour market. But in a potential signal of fewer rate hikes ahead, Lowe noted that "recent data suggest a lower risk of a cycle in which prices and wages chase one another".

"The board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment," he added.

Judging by the big afternoon lift-off, ASX 200 investors don't appear put out by all the uncertainty ahead either. Those uncertainties include the timing and extent of the slowdown in household spending, the full impact on house prices, and how the global economy holds up faced with rising rates around the world.

Lowe explained the RBA's resolve to return inflation to within its 2% to 3% target range.

"If high inflation were to become entrenched in people's expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment," he said.

What's ahead for ASX 200 investors?

While inflation is expected to fall in 2023, the RBA forecasts inflation will remain above its target level throughout 2024. It expects inflation to be around 3% by the middle of 2025.

The central bank also expects GDP growth to be below trend for the next few years. However, Lowe said, "The outlook for business investment remains positive, with many businesses operating at a very high level of capacity utilisation."

If you're investing in ASX 200 shares, you should be prepared for at least one more interest rate increase. Perhaps more.

"The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary," Lowe said.

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 man has a surprised and relieved expression on his face. as he raises his hands up to his face in response to the high fluctuations in the Galileo share price today
Broker Notes

Bell Potter says this ASX 200 stock can rise 100%+

Let's see which stock the broker is tipping as a buy to clients.

Read more »

Man sitting in a plane looking through a window and working on a laptop.
Broker Notes

Macquarie tips 28% upside for this ASX All Ords tech stock

Let's see what the broker is saying about this growth stock.

Read more »

Man drawing an upward line on a bar graph symbolising a rising share price.
Share Gainers

Why Fletcher Building, Johns Lyng, Pilbara Minerals, and Zip shares are charging higher

These shares are having a strong session on hump day. But why?

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why Austal, Beach Energy, Perseus, and Platinum shares are falling today

These shares are having a tough time on hump day. But why?

Read more »

A man looking at his laptop and thinking.
Broker Notes

Up 17% in 2025, how much more upside does Macquarie tip for Metcash shares?

Following Tuesday’s merger and earnings news, Macquarie changed its rating for Metcash shares.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Record Highs

Breaking: The ASX 200 just hit a new all-time high

Australian shares have exploded 16.8% higher in two months.

Read more »

Female ASX travel shares investor with surprised expression drinks a cup of tea while reading the newspaper at her desk
Broker Notes

Macquarie is tipping this top ASX 200 share to deliver a 35% return

The leading broker sees major upside potential for this growing company.

Read more »

a woman drawing image on wall of big fish about to eat a small fish
Mergers & Acquisitions

Guess which ASX 300 share just received a takeover offer

This share is jumping today after receiving a takeover offer.

Read more »