What do higher interest rates mean for the Aussie share market?
The Reserve Bank of Australia has begun unwinding its pandemic-era interest rate cuts, leading many to wonder what this will mean for households, businesses and, of course, shares.
The fact that rates are rising from such a low base — and alongside an improving economy — should give investors comfort, but some uncertainty is sure to persist. Below, we take a look at what higher interest rates might mean for Aussie shares.
First, how do interest rates affect the economy?
When the RBA raises or lowers the cash rate, it has immediate effects on many of the moving parts of the economy, either directly (such as by increasing or decreasing the cost of doing business) or simply by shifting the economic mood.
Lower interest rates make servicing debt more manageable, which is why cuts to the cash rate are usually followed by a mad rush to buy property.
At the same time, businesses will be more inclined to borrow money to buy inventory and hire new staff, which in turn affects the level of employment and inflation in an economy.
If, however, the RBA decides to raise interest rates, it will immediately translate to higher borrowing costs for both households and businesses.
As a greater chunk of Australians’ income is eaten up by debt repayments, less is left over to spend as they please. This drop in demand lowers businesses' revenue and profits, impacting their ability to hire and reinvest.
So what can we expect from the share market?
We might intuitively expect shares to fall as rates rise — after all, much of economic growth is fuelled by debt, and as businesses’ borrowing costs increase, opportunities for growth narrow.
But the relationship between interest rates and the share market isn’t so clear cut, and for all the times shares dipped during a tightening cycle, we can find just as many times where they rose.
AMP chief economist Shane Oliver recently poured water on the idea that higher interest rates alone will tank Aussie shares, arguing that rising rates typically only spell trouble if they go beyond “normal” levels.
“They are also a problem when rate hikes are aggressive, as in 1994 when the cash rate was increased from 4.75% to 7.5% in four months,” he said.
There’s also the matter of savings account rates, which aren't so attractive at the moment. Though they’re set to rise soon, Oliver is betting that many Australians will still prefer the comparatively higher returns offered by the share market.
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“If the RBA cash rate rises to 1.5% by year end, deposit rates would still be less than 2%, so they will still be low relative to the grossed-up dividend yield on shares of around 5.5% leaving shares relatively attractive,” he said.
Lastly, the Aussie share market tends to move in line with the US share market, so conditions in the US could wind up being more meaningful than any domestic interest rate movements.
“Given the high short term correlation between Australian shares and US shares, what the Fed does is arguably far more important than local interest rates, and this is perhaps a bigger risk given higher inflation in the US,” he said.
So higher interest rates aren’t necessarily a guarantee of lower returns on shares. Rather, it’s necessary to look at the broader context in which rates are going up, and right now the overall picture is one of high volatility.
For more information on investing and ways you can minimise risk, visit our share trading hub.
Share account comparisons on Mozo - rates updated daily
Share Trading
Small trade brokerage
Monthly fee
$3.00$0.00Invest in AU stocks, US stocks, HK stocks and ETFs on moomoo trading platform. US trades from $0.99 USD, other fees apply. Backed by a Nasdaq-listed fintech. (T&Cs apply).
Share Trading
Invest in AU stocks, US stocks, HK stocks and ETFs on moomoo trading platform. US trades from $0.99 USD, other fees apply. Backed by a Nasdaq-listed fintech. (T&Cs apply).
- Monthly fee
- $0.00
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- -
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- ASX trades are 0.03% the transaction amount, minimum $3.00 per order. US trades from $0.99 USD, other fees apply.
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- -
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ASX Shares
Small trade brokerage
Monthly fee
$0.00$0.00Join the world’s leading social trading platform, trusted by 30 million users worldwide. Invest in stocks, crypto, ETFs and more - all in one place. Hone your financial skills with a $100K virtual demo account.
ASX Shares
Join the world’s leading social trading platform, trusted by 30 million users worldwide. Invest in stocks, crypto, ETFs and more - all in one place. Hone your financial skills with a $100K virtual demo account.
- Monthly fee
- $0.00
- Monthly fee waiver
- n/a
- Special offers
- -
- Brokerage details
- There are no brokerage charges but a 0.50% fee is applied to all funds paid into or taken out of the USD settlement account
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- Settlement account offered
- Customer funds are held in a Trust Account managed by JP Morgan Chase and Co
- CHESS ownership available
- Share pack
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Read our Mozo Review to learn more about the ASX Shares
Share Investing
Standard
Small trade brokerage
Monthly fee
$0.00$0.00CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).
Share Investing
CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).
- Monthly fee
- $0.00
- Monthly fee waiver
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- Brokerage details
- $0 for trades up to $1,000. Greater of $11 and 0.1% for trades over $1,000.
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Tiger Account
Small trade brokerage
Monthly fee
$5.50$0.00Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Earn 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus get US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit greater than AUD 2000. T&Cs apply – for full details, go to the Tiger Brokers website.
Tiger Account
Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Earn 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus get US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit greater than AUD 2000. T&Cs apply – for full details, go to the Tiger Brokers website.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- 7% p.a. on uninvested cash balance for 150 days valued up to AUD2,877. Plus get US$30 TSLA and US$30 NVDA shares with accumulated deposit more than A$2000. T&Cs apply.
- Brokerage details
- 0.055% of trade value, $5.50 minimum brokerage.
- Settle from any bank account
- Settlement account offered
- no
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Tiger Account
Share Trading
Small trade brokerage
Monthly fee
$7.70$0.00Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
Share Trading
Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $7.70 brokerage for trades under $100,000, then 0.05%.
- Settle from any bank account
- Settlement account offered
- Macquarie Cash Management Account
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Share Trading
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