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Key points
- The ASX 200 recived an extra push this afternoon, closing above 7,000 points
- The official cash rate will remain on hold at 0.1% as the RBA cuts bond-buying
- Aussie inflation is now tipped to rise to 3.25% before falling back to 2.75%
The S&P/ASX 200 Index (ASX: XJO), and many of its constituents, rallied in afternoon trade following the Reserve Bank of Australia's (RBA) monthly meeting. At market close, the benchmark finished up 0.49% to 7,006 points.
Today's RBA meeting was an important one as investors grow more anxious about larger and faster rate increases by the central bank. However, in the meeting, the RBA announced its decision to end its bond purchase program and hold the cash rate at 0.1%.
It appears the broader market considered the decision to be a positive one. Let's take a look at why the RBA's decision might have boosted the ASX 200 this afternoon.
Lowe sticks with dovish outlook on rates
Unlike the more hawkish tones from US Federal Reserve chair Jerome Powell, RBA governor Philip Lowe remained dovish for the near future.
In the meeting, Lowe acknowledged inflation has gained momentum more quickly than what was expected. However, Australia's inflation continues to trend at a rate lower than many other countries. While the US is touching CPI inflation rates of 7%, locally we are at 3.5%.
Additionally, the governor noted that underlying inflation is around 2.6%, which is expected to increase in the coming quarters. Although, this rate is then forecast to fall to 2.75% throughout 2023 as supply-side issues subside.
Furthermore, wages growth has been rebounding but only to similar levels witnessed pre-pandemic. Though, Lowe highlighted this may change as the labour market continues to tighten. The central bank's unemployment rate forecast for the end of 2023 is now around 3.75%.
Given the numerous positive economic indicators, the RBA made the call to end bond purchases. Since it began, the central bank's balance sheet has tripled to $640 billion.
However, the board was adamant the cut to bond-buying did not indicate an interest rate rise in the near term. Ultimately, the RBA concluded it is too early to tell whether inflation is sustainably in its target range.
On this note, RBA governor Lowe stated:
The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.
What does it mean for the ASX 200?
The remarks shared by the RBA today infer a more cautious approach to lifting the cash rate anytime soon in Australia.
This could be considered a positive for the ASX 200 and other ASX shares for three reasons:
- Inflation might not remain elevated, suggesting an easing in costs for ASX shares
- If interest rates are not increased in the near term, that could mean cheaper funding costs for companies
- Cash remains a relatively unappealing place to park cash
These factors could have been weighing on the minds of investors this afternoon, pushing the ASX 200 back above 7,000 points.
