ASX 200 Continues Higher Today as RBA Holds Rates: Defence and Financials Lead

The ASX 200 closed 0.68% higher at 9164.60 as the Reserve Bank of Australia held the cash rate at 4.35% while explicitly retaining the option to tighten further if inflation risks materialise.

ASX Today: Leaders and Laggards

The Aussie sharemarket was largely bullish on the day, with Financials leading the gains at 0.94%, Industrials adding 0.58%, and Materials closing 0.3% higher. Energy bucked the trend, falling 0.78% despite ongoing geopolitical tensions in the Middle East. The moves came as markets digested July RBA minutes showing a Board that seriously debated another 25 basis point increase before ultimately deciding it had time to assess incoming data.

Looking at the individual movers and shakers, Electro Optic Systems shares led all gainers, adding 23.02% off the back of growing HY revenue, and raised guidance. Ansell climbed 8.16%, Suncorp Group jumped 7.97% on potential takeover news, and The a2 Milk Co added 6.3%.

On the downside, Monadelphous shares fell back 11.96% to $28.50 following a soft guide for FY27, and then lithium-exposed names bore the brunt of commodity weakness, with Liontown falling 8.68% to $1.21, Pilbara Minerals down 6.03% to $5.14, and Elevra Lithium retreating 5.82% to $9.07.

RBA Minutes: Inflation Debate Balanced

The July Board minutes published by the Reserve Bank of Australia show policymakers explicitly debated a 25 basis point rate increase at the meeting, with the cash rate now sitting at what the central bank judges to be the top of neutral rate estimates. Financial conditions are deemed “somewhat restrictive” after three increases delivered earlier in 2026, yet several Board members expressed concern that upside inflation risks could still force further tightening.

Trimmed mean inflation, the RBA’s preferred core measure, rose to 3.6% in the June quarter and is forecast to remain above 3% until mid-2027, only easing toward approximately 2.5% in late 2027. Staff forecasts explicitly flag risks as skewed to the upside, driven by potential oil price shocks, persistent services inflation, and a new wildcard: artificial intelligence and data centre investment creating demand pressures across energy, specialised manufacturing inputs, and high-skilled labour markets.

The labour market outlook shows unemployment rising gradually to 4.8% by end-2028, with meaningful spare capacity not emerging until late 2027. Productivity forecasts were downgraded again, raising concerns that unit labour costs will keep services inflation elevated even as goods prices moderate.

Housing and Credit Dynamics Diverge Sharply

Dwelling prices have fallen approximately 1.5% from their March 2026 peak, and new housing loan demand has dropped sharply, particularly from investors responding to higher borrowing costs. The cooling in residential property marks a clear transmission channel for monetary policy, with implications for household wealth effects and consumption into 2027.

In stark contrast, business credit continues to grow strongly across sectors, highlighting that corporate capital expenditure, including AI infrastructure, data centres, and resources projects. remains resilient despite restrictive policy settings. The RBA now treats AI and data centre investment as a “live” upside risk to both aggregate demand and inflation, a notable shift in the central bank’s risk assessment framework.

The minutes also noted volatility in AI-linked equities and wider credit spreads on some technology bonds, while observing that Australian equities have underperformed global peers over 2026. The underperformance reflects market scepticism that Australia will capture a proportionate share of global AI capital expenditure, given the economy’s traditional weighting toward resources and financials rather than technology infrastructure.

What Lay Ahead?

Markets now face a delicate balancing act. The RBA’s decision to hold rates provides near-term relief for equities, particularly rate-sensitive Financials and quality defensives, but the explicit retention of a tightening bias and upside inflation risks mean the policy path remains uncertain. If core inflation fails to decline as forecast, or if AI-driven demand pressures intensify, the Board has made clear it will act.

The divergence between weak housing credit and strong business investment suggests the Australian economy is navigating a two-speed adjustment, with implications for sector rotation strategies. Contractors, infrastructure plays, and data centre-linked materials may continue to find support, while consumer discretionary, housing-exposed cyclicals, and lithium face structural headwinds.