The S&P/ASX 200 Index (ASX: XJO) started the day in the green but lost ground to be down 0.2% as we approached the moment of reckoning.
That moment came at 2:30pm AEST.
That’s when the Reserve Bank of Australia (RBA) released its latest interest rate call for July.
In the minutes that followed the announcement, the ASX 200 soared 0.7%. The benchmark index is currently up 0.4% for the day.
Investors were hitting the buy button after the RBA board announced a pause in its rate hike tightening cycle for July.
That leaves Australia’s official cash rate at 4.10% and the interest rate on Exchange Settlement balances at 4.0%.
Today’s hiking pause is only the second one from the RBA since the central bank began a rapid tightening cycle to bring down soaring inflation in May 2022. At that time, Australia’s official cash rate stood at a historic low of 0.10%. There have been 12 interest rate increases since then.
With interest rates remaining steady, ASX 200 shares could enjoy some sustained tailwinds over the month.
Why did the RBA opt to keep rates steady?
Explaining why the board held the cash rate steady at 4.10% RBA governor Philip Lowe said, “The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.”
Lowe added:
In light of this and the uncertainty surrounding the economic outlook, the board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook.
However, ASX 200 investors might not want to pop open their finest bottles of champagne just yet.
Lowe said that inflation had passed its peak with another decline in May. “But inflation is still too high and will remain so for some time yet,” he added.
As in prior speeches, Lowe cited the numerous difficulties that entrenched inflation can inflict on Aussie households and businesses, and the heavier cost of waiting too long to bring inflation down.
“For these reasons, the board’s priority is to return inflation to target within a reasonable timeframe,” he said.
While growth in the Australian economy has slowed and labour shortages have eased, Lowe added:
Labour force participation is at a record high and the unemployment rate remains close to a 50-year low. Wages growth has picked up in response to the tight labour market and high inflation.
What can ASX 200 investors expect ahead in 2023?
As for what ASX 200 investors can expect moving forward Lowe’s language took more of a dovish tone than in most previous announcements.
He said:
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.
Today’s pause will give the RBA more time to assess the impact of its 12 rate increases since May 2022.
Which means we may have seen the last rate increase from the RBA in the current cycle.
However, if inflation doesn’t continue to recede, or heaven forbid ticks higher, ASX 200 investors should expect interest rates to again move higher.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” Lowe reiterated.
