Buying ASX shares? Here’s what CBA says to expect from interest rates following Tuesday’s RBA hike

Yesterday, amid resurgent inflation, ASX investors were faced with the first RBA interest rate hike since November 2023.

That was back when Australia’s central bank lifted the official cash rate to 4.35%.

Which is where rates remained until February 2025, when the RBA delivered its first cut since November 2020. And in case you’ve forgotten, in November 2020, the cash rate was cut to a rock bottom 0.10% in an, erm, effort to spur ‘stubbornly missing’ inflation.

Careful what you wish for!

Following two more rate cuts in 2025, the benchmark interest rate stood at 3.60% on Tuesday morning. But on Tuesday afternoon, the RBA board announced in a unanimous decision that it was boosting the cash rate to 3.85%.

“The board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures,” the board noted.

And ASX investors hoping for a reprieve later in the year may be left wanting.

“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target,” the RBA noted. The board now doesn’t expect inflation to return to its 2% to 3% target range until 2028.

The big question now is not so much when Australia’s central bank may move to cut interest rates, but rather if you should be buying ASX shares with the prospect of another rate hike on the horizon.

The RBA’s next two rate-setting meetings are on 17 March and 5 May.

With that question in mind, we turn to the economists at Commonwealth Bank of Australia (ASX: CBA).

What is CBA forecasting for RBA interest rates?

“Inflation is simply too high for the RBA at this stage, and the central bank has signalled a stronger resolve to bring it back within target,” CBA head of Australian economics Belinda Allen said.

“This is ultimately a fine‑tuning exercise. But unless inflation materially undershoots in the March quarter, the RBA is unlikely to pause in May,” she added.

CBA expects the RBA to hold tight in March, with the official interest rate then likely to be lifted by another 0.25% at the central bank’s May meeting.

According to Allen:

As previously flagged, the risk always sat with a second rate hike to bring inflation back towards target and the economy back into balance. With the labour market now in a better position than a few months ago, and an increased resolve from the RBA, on the balance of probabilities we now see the RBA hiking again in May to take the cash rate to 4.10%.

Of course, a May rate hike is not locked in.

Allen concluded:

It would take a material undershoot in inflation in the March quarter for them to not hike the cash rate again in May. But this is a close call and will also depend on other data flow, particularly the labour market as well as high frequency indicators.

With yesterday’s rate hike largely expected, the S&P/ASX 200 Index (ASX: XJO) closed the day up 0.9%.

The post Buying ASX shares? Here’s what CBA says to expect from interest rates following Tuesday’s RBA hike 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.