Last month, the Reserve Bank of Australia (RBA) did something it hadn't done for more than four years – it cut interest rates. The 25 basis point reduction in the cash rate, taking it down to 4.1%, was welcomed by Australians all over the country. The rising cost of living pressures over the past few years, fuelled by pandemic-induced inflation, has caused a painful cost of living crisis for Australians.
Mortgage holders, in particular, who had to endure more than a dozen interest rate hikes between 2022 and 2024, would no doubt have been relieved.
The Reserve Bank has been coy about its intentions over the rest of 2025, with RBA governor Michelle Bullock telling Australians not to get their hopes up for another cut. However, other commentators are more dovish. Last month, we looked at Westpac's prediction that the RBA will cut rates at least three more times this year, with the cash rate anticipated to hit 3.35% by December.
As most ASX investors know, interest rates have a real impact on the share market, with cuts generally viewed as conducive to higher share prices. However, this rising tide doesn't lift all stocks equally. So if the RBA does cut interest rates again this year, which ASX shares stand to benefit the most?
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Which ASX shares will benefit most from an interest rate cut?
To answer this question, let's discuss what an interest rate cut means for the economy. A fall in interest rates effectively reduces the cost of borrowing money in the economy. Its largest impact is arguably on mortgages. With a sizeable chunk of the population currently servicing a mortgage, the immediate reduction in interest rates puts additional cash into any homeowner's pockets almost straight away.
Renters are less favoured, of course. However, there is a case to be made that lower interest rates result in downward pressure on rents.
So all in all, an interest rate cut delivers a shot in the arm to our local economy by putting more cash in people's pockets. But which ASX shares does this benefit?
Well, it's arguably going to benefit the companies that sell us discretionary goods and services the most.
First, though, it's important to note that when times are tough, consumers still have to buy life's essentials. That's why sales at Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) have continued to rise in recent years despite high interest rates and the cost-of-living crisis.
Other 'inelastic' goods and services have also been protected. That might be mobile and internet plans from Telstra Group Ltd (ASX: TLS) or Transurban Group Ltd (ASX: TCL)'s toll roads.
As such, these stocks might have been safer havens for investors when rates were rising but might not benefit as much from rate cuts as other consumer discretionary stocks.
Consumers tend to cut back on the more luxurious goods, the 'wants', not 'needs'. Hence, those goods and services arguably stand to benefit the most from a cut in interest rates.
More cash for life's luxuries?
If rates are cut, one might expect to see consumers with a little more cash in their pocket to buy that new TV or second refrigerator, perhaps a new car, or the outdoor furniture set or garden that they might have been putting off.
It's the companies that sell these kinds of goods and services that might just stand to benefit the most from lower interest rates.
So, if the RBA does move to cut rates further this year, I'll be keeping an eye on the share prices of consumer discretionary stocks like Super Retail Group Ltd (ASX: SUL) and JB Hi-Fi Ltd (ASX: JBH), as well as Eagers Automotive Ltd (ASX: APE) and Adairs Ltd (ASX: ADH). Investors pull back from these kinds of companies when times are tough, but they just might flock back to them when that pressure comes off.
Your move, Michelle.
