The ASX 200 Index held steady on Tuesday after the Reserve Bank of Australia (RBA) delivered its interest rate decision. It was trading at A$8,325, up by 16.5% from its lowest point in April this year.
RBA interest rate decision
The ASX 200 Index rose slightly after the RBA decided to cut interest rates by 0.25%, moving them from 4.10% to 3.85%. It was the second time that the bank has slashed rates in the current cycle.
In a statement, Governor Michele Bullock justified the cut by pointing to recent data that showed that inflation continued to ease. The most recent data showed that the trimmed mean Consumer Price Index (CPI) moved below 3% for the first time since 2021. This means that the figure has moved within the target band of 2% and 3%. The bank said:
“With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate. The Board assesses that this move will make monetary policy somewhat less restrictive. It nevertheless remains cautious about the outlook.”
The stock market typically does well when interest rates are cut for three main reasons. First, lower interest rates make it cheap for companies to borrow money, lowering their interest expense. They also lower the borrowing costs for consumers, leading to higher spending over time.
Second, lower rates make government bonds less attractive, triggering a risk-on sentiment among investors. The ten-year yield of Australian government bonds dropped to 4.46% on Tuesday, down from 4.60% earlier this month. Similarly, the 30-year yield dropped to 5.0% from this month’s high of 5.2%.
Third, lower rates lead to a risk-on sentiment among investors in their quest for higher returns. This, in turn, leads to higher demand for equities since they are often viewed favorably.
Analysts anticipate the RBA will pause its interest rate cuts in the next meeting in July. Most of them are now pricing in two more cuts this year, which will bring the benchmark rate to 3.35%.
US and China truce
The ASX 200 Index has also done well in the past few weeks because of the trade negotiations between the US and China.
After a two-day meeting in Switzerland, the two countries decided to de-escalate by cutting their tariffs. The US lowered tariffs on Chinese goods to 30% from 145% earlier on. China slashed its tariffs on US goods to 10%.
A trade deal between the two countries matters because of the vast amount of trade that Australian companies do with China. Most of them count China as the largest market because of its purchases on items like coal and iron ore.
Most ASX 200 Index companies were in the green on Tuesday. Technology One was the best-performing company as the stock jumped by 10.5%. Parenti Global, South32, Austal, Wisetech Global, and Resolute Mining rose by over 2%.
Australian bank stocks also jumped after the RBA decision, with ANZ Holdings jumping by 2.15% and NAB rising by 1.83%.
ASX 200 Index analysis
ASX 200 Index chart | Source: TradingView
The daily chart shows that the ASX 200 Index has rallied in the past few weeks, moving from a low of $7,146 in April to $8,340. The 100-day and 50-day moving averages have made a bullish crossover.
Top oscillators like the Relative Strength Index (RSI) and the Stochastic have all pointed upwards, a sign that it has the momentum.
Therefore, the index will likely keep rising as bulls target the key resistance level at $8,625, which is about 3.40% above the current level.
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