The Reserve Bank of Australia (RBA) has hiked the interest rate by another 0.25%, sending the S&P/ASX 200 Index (ASX: XJO) downwards.
ASX shares, as measured by the ASX 200, collectively fell by 0.5% today, with most of the fall coming after the RBA’s announcement.
What did the RBA say?
The RBA explained that inflation is too high in Australia. The latest inflation measure showed that inflation was 6.9% over the 12 months to October 2022. It decided to increase the interest rate by 0.25% to 3.10%.
While global factors “explain much of this high inflation”, strong domestic demand is “also playing a role”. Returning inflation to the RBA’s target of 2% to 3% “requires a more sustainable balance between demand and supply”. But, it is the RBA’s priority to re-establish low inflation over time.
This could mean that interest rates stay high for longer, which could impact the valuations of some ASX 200 shares.
Inflation expectations
Inflation is expected to rise in the months ahead, with a forecast of a peak at around 8% over the year to December 2022.
But, inflation is then expected to decline in 2023 as supply-side problems are resolved, commodity prices reduce and demand growth is slowed.
The RBA’s most likely scenario is that CPI inflation will decline over the next couple of years to be a little above 3% over 2024.
Strong economy and employment
The central bank also revealed that it’s expecting Australian economic growth to be around 1.5% in 2023 and 2024. This would imply that there won’t be a recession.
The RBA is expecting economic growth to “moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions.”
It was also noted that the unemployment rate declined to 3.4% in October, the lowest since 1974. Job vacancies and job ads are both at “very high levels”. Many ASX 200 shares are having difficulty hiring workers and wage growth is expected to rise. The RBA board wants to avoid a prices-wages spiral.
Are there more interest rate increases coming?
While acknowledging that there is a lag effect from its rate hikes, and that it wants to keep the economy on an “even keel”, the board “expects to increase interest rates further over the period ahead”.
It concluded that it “remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Interest rates being higher may not be much help to ASX bank shares from here because of the danger of rising arrears.
There are certain ASX 200 shares that I think could be worth investing in, like Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), but only with a long-term view. I think there’s a fair chance there may be more volatility ahead in the next few months. If share prices do drop, I think then would open up another good widespread investing opportunity.
