What the RBA minutes imply for the ASX 200 and higher interest rates

Woman holding an orange and looking at the expensive grocery receipt, symbolising inflation.

The S&P/ASX 200 Index (ASX: XJO) is down 0.41% in early afternoon trade on Tuesday.

The benchmark index has slipped more firmly into the red following on the 11:30am AEST release of the Reserve Bank of Australia's minutes from its 18 June interest rate policy meeting.

As you're likely aware, at that meeting the RBA opted to hold the official interest rate steady at 4.35%.

You also probably recall that it was only back in May 2022 that the official Australian cash rate stood at a historic low of 0.10%. That's when the central bank commenced a rapid tightening policy that saw rates lifted 13 times since then to tamp down runaway inflation.

But with inflation proving sticky in recent months, should ASX 200 investors brace for another rate hike? Or can we look forward to the RBA moving towards easing?

Here's what today's minutes reveal.

What the RBA minutes reveal for ASX 200 investors

My biggest takeaway from the RBA minutes is that the bank's board members are just as uncertain about the shorter-term inflationary path as the rest of us.

Which means that traders should remain nimble. Meanwhile, ASX 200 investors with a long-term horizon would do well to ignore the month-to-month uncertainties and hold onto their quality stocks.

The RBA pointed to a mixed picture in its ongoing efforts to bring inflation back within its 2% to 3% target range.

The board noted:

Relative to expectations, growth in overall household and public consumption in the March quarter had been stronger than expected while other components had surprised on the downside.

The members said that while energy rebates and rent assistance would lower headline inflation in 2024, the direct effect would be reversed later in 2025.

And the Aussie labour market remained tight relative to full employment, though conditions had continued to ease gradually in recent months.

On that uncertainty front, the board noted, "It was too early to determine if this signalled a more rapid easing in aggregate wages growth than currently expected."

As for ASX 200 investors potentially facing higher interest rates, the RBA noted, "Inflation remained above the target range and had been a little higher than expected in prior months."

But the board is still awaiting more data.

"Members acknowledged that these (limited) inflation data had increased the risk that sustainable progress towards the inflation target may be slower than forecast," the members said.

And the RBA made it clear that the door is wide open for more interest rate hikes if required.

According to the minutes:

Several measures of inflation expectations had drifted up in recent years to be around the midpoint of the target band, after having been below target during the low-inflation period prior to the pandemic.

Members acknowledged that if inflation expectations were to rise materially from current levels, it could require significantly higher interest rates to bring inflation back to target, with adverse implications for growth in output and employment.

With the data on hand, the RBA still believes inflation will likely return to its target by 2026 "despite some elevated upside risk around the forecast".

The RBA offered its usual caveat that it "will do what is necessary" to bring inflation back to target.

But ASX 200 investors will have to wait for the next batch of inflation data to see if boosting the cash rate is necessary again.

According to the RBA, "The extent of uncertainty at present meant it was difficult either to rule in or rule out future changes in the cash rate target."

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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.