ASX 200 jumps higher as RBA lifts interest rates by another 0.50%

Interest rate written with a green arrow going up.

Interest rate written with a green arrow going up.The Reserve Bank of Australia (RBA) has increased the cash target rate by 0.50%. That brings Australia’s official interest rate to 1.85%.

The RBA board also increased the interest rate on Exchange Settlement balances by 0.50% to 1.75%.

With the market having broadly priced in today’s rate hike, with some investors having braced for a steeper increase, S&P/ASX 200 Index (ASX: XJO) shares jumped 0.30% higher immediately following the RBA announcement at 2:30pm AEST.

In later afternoon trading, the ASX 200 is up 0.50% since the announcement.

Four consecutive months of tightening

This marks the fourth month in a row of interest rate hikes from the central bank.

In May, the RBA raised the cash rate for the first time in a decade. The central bank boosted rates from the then all-time low of 0.10% to 0.35%. June saw another 0.50% increase as did July, leaving the rate at 1.35% as of this morning before the latest 0.50% increase.

The latest rise was brought forth to combat inflation currently sitting at 6.1% and expected to rise to around 8% by year end before beginning to decline.

What did the RBA say about the latest interest rate hike?

The RBA board reiterated the central bank’s priority of focusing on getting inflation back down into its 2% to 3% target range “over time”. It flagged the importance of “keeping the economy on an even keel” during this process.

Doing so, the bank said, will require a delicate approach.

According to RBA Governor Philip Lowe:

The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments. The outlook for global economic growth has been downgraded due to pressures on real incomes from higher inflation, the tightening of monetary policy in most countries, Russia’s invasion of Ukraine and the COVID containment measures in China.

As for the 6.1% headline inflation figure, the highest rate of price increases witnessed down under since the early 1990s, the RBA expects this to peak by the end of 2022.

Looking ahead, the bank expects CPI inflation of approximately 7.75% over 2022, “a little above” 4% over 2023 and around 3% over 2024.

Lowe expects the Aussie economy to keep growing strongly this year before the pace of that growth slows.

The bank is forecasting GDP to grow by 3.25% in 2022 and 1.75% in 2023 and 2024.

Tight labour markets and some uncertainty ahead

In raising interest rates, the RBA also pointed to the strength of the labour market, with June’s 3.5% unemployment rate the lowest in almost 50 years.

Looking ahead, the bank forecast unemployment of some 4% by the end of 2024. It added that wages are likely to increase “from the low rates of recent years as firms compete for staff in the tight labour market”.

The central bank said the behaviour of household spending remained “a key source of uncertainty”.

According to Lowe:

Higher inflation and higher interest rates are putting pressure on household budgets. Consumer confidence has also fallen and housing prices are declining in some markets after the large increases in recent years. Working in the other direction, people are finding jobs and obtaining more hours of work. Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic.

What’s next for RBA interest rate moves?

ASX 200 investors and Aussie borrowers and lenders can likely expect further interest rate hikes from the RBA ahead.

Lowe said that the board “expects to take further steps in the process of normalising monetary conditions over the months ahead”.

However, he stressed the bank is not on a pre-set path.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” Lowe said.

The post ASX 200 jumps higher as RBA lifts interest rates by another 0.50% appeared first on The Motley Fool Australia.

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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.

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