The ASX share market could receive confusing signals from central banks if interest rates are cut further next month.
Interest rates aren't cut because economies are performing strongly, it's because they need a boost to avoid a recession, or at least lessen the blow.
The problem is that interest rate cuts simply might not have much of an effect at these already-low levels. If your budget is tight and your suddenly have a few extra hundred dollars a year, are you going to go and spend it? A lot of people won't. I'd imagine they would use to pay down debt quicker or at least build up a little more cash.
But low interest rates have a really negative impact on people who were living off cash in the bank from term deposits from banks like Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ).
It also discourages people from saving cash, which I think is quite a negative outcome considering how important it is to build a saving mentality from a younger age.
But low interest rates have encouraged people to invest significantly into the share market, sending asset prices higher and higher. This is good for people who already own shares, but I don't think it's good for those who are new to investing and are buying at very high prices.
With some market commentators predicting a rate cut from either (or both) the Reserve Bank of Australia (RBA) and the US Federal Reserve next month, it's hard to know what's coming next.
Foolish takeaway
Will lower rates send share prices even higher? Or will people suddenly become fearful about what these low rates are signalling? It's really hard to say. That's why I think you just need to be brave and remain mostly invested in good businesses whatever it's going on. If interest rates do send asset prices up then we'll benefit. And if not shares, then what else?
