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RBA's impact on the stock market

The Reserve Bank of Australia has cut the official interest rate by 0.15 percentage points in its first shift since sitting at the already historic low of 0.25 per cent from March. The decision to reduce the cash rate is likely welcomed by many as a valuable way to boost an economy staggering from its COVID-19 hit.

Lower interest rates can have several impacts -

  • Makes mortgage interest repayments more affordable

  • Increases personal disposable income

  • Encourages spending

  • Weakens the value of the Australian dollar

  • Encourages investment in property

With more money in consumer pockets, businesses will be hoping increases in spending will provide much-needed boosts to bottom lines. While businesses concerned about the cost of funding will also welcome the changes. Exporters will also be hoping for a boost, as when interest rates fall, the Australian dollar usually weakens making Australian commodities and exports more affordable for offshore buyers.

In times of lower rates, share markets can be popular with investors who are happy to take on a little more risk for the chance of a better return than cash. Money is also cheaper, so investors may even borrow more to purchase shares.

While low-interest rates may provide a valuable shot for the economy, and drive investors to search for greater yields, particularly from riskier investments, decisions should always take into account all the facts. It is important to remember that equity prices are driven by a wide range of factors - outlook for growth, risks, and often (irrationally) investor sentiment.

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