The ASX 200 index drifted downwards after the Reserve Bank of Australia (RBA) decided to hike interest rates by 0.25%. It dropped to a low of A$7,290, which was a few points below last month’s high of A$7,396. The AUD/USD spiked to a high of 0.6700 after the RBA decision.
RBA interest rate decision
The RBA caught many people off-guard when it decided to hike interest rates by 0.25%. As I wrote in this article, most analysts were expecting the bank to leave rates unchanged at 3.60%. However, the bank decided to hike to 3.85%. Also, the bank decided to hike the rate paid on exchange settlement to 3.75%.
In a statement, Governor Philip Lowe justified the decision to hike by citing the fact that inflation remained sticky at 7%. That is much higher than the bank’s target of 2.0%. He also warned that it will take a longer period for inflation to move back to the 2% level. It expects inflation to average 4.5% this year and 3% in 2025.
At the same time, the RBA said that the labor market remained tight, with the unemployment rate stuck at the lowest level in over 50 years. Therefore, a combination of high inflation rate and low unemployment rate made conditions nice for a rate hike. The bank said:
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”
Unlike in the United States, Australia’s banking system has been safe, helping to justify the current rate hike. Focus now shifts to the upcoming interest rate decision by the Federal Reserve scheduled for Wednesday.
Most ASX 200 constituent companies were in the green. 87 companies dropped and 13 were flat. Westpac share price jumped by 0.53% while ANZ, CBA, and NAB were also in the green. Banks tend to rise when interest rates jump because of improved interest margins.
ASX 200 index forecast
ASX 200 chart by TradingView
The ASX 200 index drifted downwards and reached a low of A$7,267, the lowest point since April 6. As it dropped, the index moved below the 50-period moving average while the Relative Strength Index (RSI) is approaching the oversold level. It also moved below the 61.8% Fibonacci Retracement level.
Therefore, there is a likelihood that the ASX 200 index will continue falling as sellers target the key support at A$7,200. More upside will only be confirmed if the index jumps above $7,396.
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