By all accounts, the Reserve Bank of Australia (RBA) is expected to reveal an 'unprecedented' easing of monetary policy this afternoon. The RBA is holding an emergency meeting today and has announced that it intends to make a statement at 2.30 pm this afternoon.
There's little doubt that this announcement will include an emergency interest rate cut. The RBA has already cut rates once this month to 0.5% – a record low. Whether the cash rate will be at 0.25% or zero by this evening remains to be seen.
Also expected to be announced is an Australian Quantitative Easing program, also known as 'unconventional' monetary policy. This will aim to inject stability and capital into the bond markets, which has a stabilising effect on the overall financial system, which is under extreme pressure right now.
The Australian dollar is in the firing line as a result. We saw the Aussie dollar crash to its lowest level since 2002 overnight, reaching as low as 55 US cents. It is currently trading for 55.81 US cents.
What will zero interest rates mean for ASX shares?
Whether that cash rate is cut to 0.25% or zero this afternoon makes little difference in reality – 0.25% is practically zero for all intents and purposes.
This new low will mean a few things for ASX investors. Firstly, cash as an investment is history, at least while interest rates stay this close to zero. No bank account or term deposit will be offering anything close to a real rate of return in the coming weeks.
However, it's going to be good news for those with mortgages or other kinds of rate-sensitive loans. We are likely going to see the lowest mortgage interest rates in history – at least for those with variable interest rates.
For ASX shares, it's going to be an interesting time. If rates stay 'lower for longer', interest in the share market is likely to grow even further than January's record highs when the coronavirus panic subsides. That's because there is no real alternative to shares (outside perhaps the property market) for investors seeking yield if interest rates are at zero.
But those businesses that rely on yield spread are going to face bleak times. ASX banks like Commonwealth Bank of Australia (ASX: CBA) come to mind, as do businesses like Challenger Ltd (ASX: CGF) and Netwealth Group Ltd (ASX: NWL).
Foolish takeaway
We are in strange and uncertain times here on the ASX. We've long watched other countries deal with zero or even negative interest rates and this strange paradigm has finally come to the ASX. In my opinion, ASX dividend shares remain our best bet in this brave new world!
