ASX200 jumps as RBA holds rates on pause but “uncertainty” remains

The Reserve Bank of Australia (RBA) has kept interest rates on hold at 4.35% in line with expectations.

The market has responded in turn jumping near 0.30% to 7,696.4pts as at 2.35pm AEDT.

However, the RBA noted that despite moderating inflation, economic outlook remains “highly uncertain.” Especially because the central bank expects spending to increase later this year.

“After recent declines, real incomes have stabilised and are expected to grow from here, which is expected to support growth in consumption later in the year,” the bank wrote on Tuesday.

“Meanwhile, growth in unit labour costs remains very high. It has begun to moderate slightly as measured productivity growth has picked up in the past two quarters but whether this trend will be sustained is uncertain.”

Australia’s hit 3.4% MoM

The country’s inflation rate read 4.1% in the latest YoY data for Q4 in 2023 and while pressures remain, the Australian economy has seen little reason to raise rates since.

Especially because monthly CPI data released in late February came in at 3.4% – closer to the top end of the RBA’s 2-3% target inflation band.

On the whole, our disinflation trajectory remains on-track, despite rental prices remaining resilient.

“While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia,” the RBA wrote.

Barclays Australia expects the first RBA interest rate cut to come in Q3, while National Australia Bank (NAB) analysts see it occurring in Q4.

US Fed still the tastemaker

The wide majority of calls expect the first RBA rate cut to occur in the second half of the calendar year, and most likely after the US Fed makes its cut first.

The Fed swap market has priced in less than a 50% chance the Fed will cut in June, however, which was the mood in the room earlier in the year.

The impetus for that sentiment came from bullish comments Powell made in December last year.

Notably, his recent decision to tell US Congress that the Fed is “not far” from rate cuts – which helped push the ASX to a fresh all time high in Week 10 – hasn’t caused quite the same optimism.

Former US FDIC Chair Sheila Bair called expectations for an early US rate cut “irrational” back in December.

And here’s a fun fact – not long after the RBA decision, the Bank of Japan – at the centre of the world’s 4th largest economy – has raised rates there to target 0.0% – 0.1% after being negative for eight years.

This follows stronger than anticipated wage growth in Japan revealed last week.