S&P/ASX 200 Index (ASX: XJO) investors banking on a pause in interest rate hikes are likely to be disappointed.
The Reserve Bank of Australia (RBA) makes its next rate announcement on Tuesday, 4 April.
What's happening with the RBA tightening cycle?
At its meeting earlier this month, the RBA lifted interest rates by another 0.25%.
That marked the central bank's tenth consecutive rate hike and brought Australia's official cash rate to 3.60%.
With that move largely priced in by the markets, the ASX 200 gained 0.6% immediately following the announcement.
Among the good news delivered by RBA governor Philip Lowe, he noted, "The monthly CPI indicator suggests that inflation has peaked in Australia."
As for the not-so-good news, Lowe said, "It will be some time before inflation is back to target rates."
He added, "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."
So why are futures markets now pricing in the likelihood of an April pause by the RBA?
Why ASX 200 investors should expect an April rate hike
The popular idea that the RBA might lift its finger off the rate hike button in April stems from the banking crisis that swept from the United States into Europe.
The Collapse of Silicon Valley Bank, the 18th largest in the US before its demise, rattled global markets and had many investors thinking the Federal Reserve would also pause its tightening cycle this week.
When the banking contagion spread to Credit Suisse, leading to the Swiss government's engineered takeover of the fast-sinking Credit Suisse by UBS, many investors also thought European central banks would take a breather from further rate hikes.
And that same thinking is going on in regard to the RBA's April meeting.
A pause by the RBA would most likely see a relief rally for ASX 200 shares. But investors shouldn't expect one.
The US Fed, the European Central Bank, and the Bank of England all increased their nation's cash rates at their most recent meetings. The Fed and BoE both hiked by 0.25% this week, while the ECB lifted rates by 0.50% last week.
And according to BIS Oxford Economics head of macroeconomic forecasting Sean Langcake, ASX 200 investors can expect similar action from the RBA.
"Central banks can walk and chew gum – they have other tools to deal with liquidity shortages, but reining in inflation still remains the primary goal," Langcake said (quoted by The Australian Financial Review.)
Langcake added:
If the ECB and Fed have decided their markets can weather a rate hike, it would be very odd for the RBA to reach a different conclusion. Especially after the assurances they gave earlier this week on the strength of Australian banks.
Betashares chief economist David Bassanese is also forecasting another rate increase at the next meeting.
"My base case remains the RBA will raise rates once more in April and then signal a pause," he said. "This depends on a still reasonably firm retail sales and monthly CPI report next Tuesday and Wednesday respectively."
Now most ASX 200 shares are well-positioned to handle another 0.25% increase in borrowing costs.
But if the market is pricing in a pause, any rate increase could see the benchmark index take a tumble on the day of the announcement.
