One of the reasons that ASX investors took their foot off the market accelerator at the end of August and stopped pushing the S&P/ASX 200 Index (ASX: XJO) up is highly likely to be the change of expectations of where interest rates are headed next.
As most investors (and mortgage-holders) would know, the Reserve Bank of Australia (RBA) has spent most of 2025 in a dovish pivot. The RBA reduced rates in February, May, and then August, delivering a 25-basis point cut each time.
Investors, happy with the cuts, were expecting rates to fall even lower. But last month's inflation numbers changed all of that.
As we covered at the time, the consumer price index (CPI) rose by an unexpectedly high 1.3% over the September quarter, putting the annual rise at 3.2%. Trimmed mean inflation, which is the metric the RBA values, came in at an annualised 3%, which is right at the top of the RBA's 2% to 3% target band.
Unless the numbers for the December quarter are a lot lower than that, this means we can probably kiss the prospect of another rate cut in the immediate future goodbye.
Hence, the market's rather miserable November so far.
Most Australians, and almost anyone who invests in property or shares, want rates to be as low as possible. But higher interest rates aren't always a bad thing.
In fact, a 3.6% cash rate means ASX investors have a real opportunity to keep their money in a safe cash asset and get a real return on their capital, which is not something that has been an opinion for much of the past decade.
Interest rates are a double-edged sword
To explain, let's assume that the current rate of inflation is 3%, as it was at the end of September.
Right now, the best interest rate you can get on a savings account or term deposit is sitting at about 4.2%.
4.2% means you can get a completely safe (at least on cash up to $250,000) real return of 1.2% on your money at the moment. Unlike the share market, cash investments carry no risk of capital loss.
This might not suit an investor looking to build wealth at a rapid rate. But it would certainly be useful to retirees, other investors living off their investments, or anyone wanting to keep their money safe whilst saving for a house, for example.
As it happens, a 4.2% interest rate also beats the dividend yields available on many popular ASX shares right now. That includes Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Wesfarmers Ltd (ASX: WES), and Coles Group Ltd (ASX: WES).
Of course, that doesn't take the benefits of franking credits into account. But even so, today's interest rates aren't all bad news for investors and savers.
