The ASX 200 (ASX: XJO) dropped 0.3% after the Reserve Bank of Australia (RBA) decided to increase the interest rate by 25 basis points (0.25%) to 3.85%. The ASX 200 was up 1.1% before the announcement, now it’s up 0.8%.
At a time when some central banks in the northern hemisphere are still thinking about cutting rates, the RBA has decided it’s necessary to increase the cash rate.
Inflation is too strong
The RBA said that while inflation has fallen substantially since its peak in 2022, it has picked up materially in the second half of 2025.
The RBA board thinks that inflation is likely to remain above its target for some time, with the rise of inflation reflecting greater capacity pressures.
Growth in private demand has “strengthened substantially more than expected” due to both household spending and investment.
It also noted that activity and prices in the housing market have picked up.
The RBA said it is uncertain whether financial conditions remain restrictive, with credit readily available to both households and businesses, and the effects of earlier interest rate reductions yet to fully flow through to total demand, prices and wages.
Australia’s central bank also noted that the exchange rate, money market interest rates and government bond yields have risen as markets expected a rise of the cash rate.
The labour market also remains a “little tight” according to the RBA, with a stabilisation in recent months, in line with the increase in momentum of economic activity. The unemployment rate has also been stronger than expected.
Wages aren’t growing as fast as the peak, but growth remains strong.
The RBA is worried that inflation could continue rising if growth remains stronger than expected.
Will there be more increases?
While part of the inflation reflects temporary factors, the RBA is monitoring private demand and labour market conditions.
The RBA didn’t specifically say it’s expecting there to be another increase, but it will continue to monitor the data, the global economy, financial markets, domestic demand and the outlook.
Is this a good time to invest in ASX 200 shares?
I believe there are always opportunities to be found on the ASX, though at times there are more ideas than others.
Higher interest rates may lead to price declines for some names. But, with its bank-heavy focus, it’s possible the ASX 200 may see the banking sector rise if higher profits are expected as a result of the RBA rate hike.
I’m particularly going to scan for opportunities in the ASX growth share segment of the market because rate hikes can have a bigger negative effect at that end of the market.
