Interest rates cuts are not the answer for ASX shares

The Reserve Bank of Australia (RBA) and US Federal Reserve have both cut interest rates. I don't think this is the answer.

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The Reserve Bank of Australia (RBA) and US Federal Reserve have both cut interest rates. I don't think this is the answer.

Yesterday the RBA decided to cut Australia's interest rate by 0.25% to 0.5% – the ASX 200 (INDEXASX: XJO) fell back to a reduced rise for the day.

Overnight the US Federal Reserve cut the US interest rate by 0.5%. What a big move! Guess what the S&P 500 (INX) did? Down 2.8%.

It didn't work! Were central bankers hoping for shares to go up? 

I'm not exactly sure what investors were expecting. Interest rates straight to 0%? GFC level quantitative easing? Governments need to take control in this type of situation. 

The problem is that the coronavirus outbreak at its core isn't an economic issue, it's a healthcare one that's now infecting areas of the global economy too, causing disruptions to production and supply chains.

It's not like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are suffering from a lack of liquidity like northern hemisphere banks did during the GFC.  

It's businesses like Blackmores Limited (ASX: BKL) not being able to get its products into China where the demand is. It's businesses like Kogan.Com Ltd (ASX: KGN) warning that it may not be able to get some products out of China. It's numerous smaller Australian businesses that may get one part of their product, the packaging or perhaps just screws from China, disrupting production and sale of the entire item.

Unless Australia as a country decides to build all the required factories in Australia, or compensate all coronavirus losses of income, it's hard to see how financial support or lower interest rates will make a large difference in the fight against the coronavirus.

And now we're left with another record low interest rate in Australia, with no hope of it rising any time soon. And lower profits for banks like National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

What should we do?

I don't think we should change how we behave financially. We still need to earn money as best we can. We should still spend our money. We should keep investing, particularly if share prices are lower for longer because of the coronavirus. I'm seeing a lot of opportunities opening up through this period. I'm investing. 

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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