A rate cut by the Reserve Bank of Australia (RBA) generally leads to lower borrowing costs and improved consumer sentiment.
This can positively impact certain sectors like consumer discretionary shares.
With inflation, as measured by the Consumer Price Index (CPI), having dropped to 2.4% in 12 months to the March quarter, economists are projecting a cash rate cut between 0.25% and 0.50% today.
Regardless of how much, any rate cut would be positive news for consumer discretionary shares.
Why does a rate cut benefit consumer discretionary shares?
Consumer discretionary companies tend to do well when the economy is strong.
When consumer confidence is high, people are more inclined to spend money on non-essential goods like travel, high-end brands and electronics.
These stocks sit on the opposite end of the spectrum to defensive shares, which tend to be in industries like healthcare that are essential regardless of the economic environment.
During economic downturn or uncertainty, discretionary companies can struggle as people cut spending on the things they don't need.
However, when banks pass on an RBA rate cut to mortgage holders, their variable rate loan repayments decrease.
This means a little more money in their pocket each month, which could be used on other purchases.
This is good news for consumer discretionary companies. Let's look at 3 that are set to benefit.
JB Hi Fi Ltd (ASX: JBH)
One of the largest companies in the sector, JB Hi-Fi sells discretionary consumer goods like TVs, laptops, and smartphones.
These purchases can be financed or made when consumers feel financially confident.
With a rate cut increasing disposable income (lower mortgage repayments), consumers could be enticed to upgrade electronics and gadgets.
It seems investors are anticipating this exact outcome, with its share price rising 1.30% on Monday ahead of the RBA's decision on Tuesday.
Analysts at Bell Potter tend to agree, who currently have a buy rating on the retail giant's shares and a price target of $114.00.
Macquarie also has an "outperform" rating and $111.00 price target on JB Hi-Fi shares.
Harvey Norman Holdings Ltd (ASX: HVN)
Another retail giant set to benefit from a rate cut is Harvey Norman.
Like JB Hi-Hi, Harvey Norman sells big-ticket items (e.g. furniture, whitegoods) that benefit from improved consumer confidence.
Importantly, Harvey Norman also owns a large portion of its retail property portfolio.
Lower rates typically increase commercial property valuations and reduce financing costs, enhancing its asset base and earnings.
This also helps the company pay a generous dividend to investors even in times of economic downturn.
Bell Potter is forecasting fully franked dividend yields of 4.7% in FY 2025 and 5.2% in FY 2026.
Bell Potter has a $6.00 price target on its shares, which indicates a 13.00% upside.
Macquarie has an "outperform" rating and price target of $5.50.
Nick Scali Ltd (ASX: NCK)
Nick Scali is a premium furniture retailer.
Like other discretionary shares, a rate cut could be positive news for the company as consumers could be inclined to spend money on home upgrades.
Improved consumer confidence can benefit big-ticket items like couches, dining tables, and home furnishings.
The share price has already risen 25.46% so far in 2025, however there remains slight upside according to brokers.
Macquarie has an "outperform" rating on Nick Scali shares and price target of $19.90.
Bell Potter has a target price of $19.00.
