After a rough day of trading on Monday, the S&P/ASX 200 Index (ASX: XJO) was up a healthy 0.8% at 2:30pm AEDT on Tuesday.
That's when the Reserve Bank of Australia (RBA) reported its latest interest rate decision. And the ASX 200 pushed higher to be up 0.9% in the minutes that followed.
As I'm sure you're aware, on 18 February, investors and mortgage holders alike were gifted their first rate cut since November 2020. That was when Australia's central bank had rather dubiously cut the official cash rate to 0.10% in hopes of stoking inflation.
After achieving that goal, and then some, the RBA went on a tightening path commencing in May 2022, lifting interest rates to 4.35% by November 2023.
Following on the 0.25% easing this February, Australia's official cash rate stood at 4.10%.
And that's where it's going to remain. At least until the RBA's next interest rate announcement on 20 May.
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ASX 200 edges up as RBA keeps interest rates on hold
With money markets having priced in only a 12% chance of a rate cut today, ASX 200 investors are taking the central bank's decision to keep the official interest rate on hold in stride.
In a promising sign for potential rate cuts ahead in 2025, the RBA noted:
Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. Recent information suggests that underlying inflation continues to ease…
So why aren't ASX 200 investors celebrating an interest rate cut today?
Well, there's a lot of uncertainty ahead, particularly from beyond our borders. (Yes, we're looking at you, Donald Trump.)
The RBA board said it needs to be confident that inflation has been tamed and sustainably tracks in the midpoint of its 2% to 3% target range.
The board said it remains cautious about the outlook but noted that "monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation".
One of the sticking points to future rate cuts could be the Aussie labour market, which remains tight.
"Wage pressures have eased a little more than expected but productivity growth has not picked up and growth in unit labour costs remains high," the board said.
The RBA also cited "notable uncertainties about the outlook for domestic economic activity and inflation", both of which it said could potentially surprise to the upside or downside.
Getting back to how US President Donald Trump could impact the timing and number of interest rate cuts ASX 200 investors may see in 2025, the RBA said:
Recent announcements from the United States on tariffs are having an impact on confidence globally and this would likely be amplified if the scope of tariffs widens, or other countries take retaliatory measures. Geopolitical uncertainties are also pronounced.
As for the impact these factors could have on inflation, the board noted inflation could move in either direction.
Summing up why interest rates were kept on hold today, the RBA said, "The continued decline in underlying inflation is welcome, but there are nevertheless risks on both sides and the board is cautious about the outlook."
