Buying ASX shares and keeping one eye on the Reserve Bank of Australia and interest rates?
You're not alone.
But like it or not (I'm guessing not), interest rates are now looking more likely to increase than decrease in 2026.
At the RBA's 9 December meeting, when the central bank opted to keep the benchmark Aussie interest rate on hold at 3.60%, the board noted, "The recent data suggest the risks to inflation have tilted to the upside."
The board added that, "The data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring."
While the future is inherently unknown, an increasing number of economics analysts, including The Australian Financial Review's John Kehoe, are expecting at least one if not two interest rate increases in 2026.
We'll look at how that might impact ASX shares in various sectors below.
But first…
Why Aussie interest rates are likely heading higher in 2026?
"Reserve Bank of Australia governor Michele Bullock will be forced to increase the 3.6% cash rate, likely more than once," Kehoe said (quoted by the AFR).
Kehoe noted:
Inflation is well above the midpoint of the Reserve Bank of Australia's 2% to 3% target band. Headline inflation was 3.8% and underlying inflation 3.3% in annual terms in October.
The economy appears to be hitting its speed limit and running into capacity constraints. Growth is rebounding, consumers are spending more and business investment is picking up as new data centres are built. The unemployment rate is low at 4.3%. Credit is flowing to borrowers and house prices are rising strongly.
ASX share investors should get some greater insight on potential 2026 RBA interest rate hikes on 28 January. That's when the ABS reports the December quarterly inflation data.
Kehoe concluded:
The RBA hopes some of the recent price pressures are temporary. But the bank is worried about persistent price pressures in labour-intensive market services such as restaurants, home building and consumer durable goods. Bullock and her nine-member board will need to act.
Buying ASX shares amid rising rates
Every company has its own unique strengths and weaknesses.
But if you're buying ASX shares amid rising interest rates, you may want to avoid companies with high debt levels, as the cost of servicing that debt will increase.
In general, consumer discretionary stocks also tend to catch headwinds if rates go up.
As do growth stocks, like many ASX tech shares, which are priced with future earnings in mind. When interest rates go up, so too does the present cost of investing in those future earnings.
And ASX REITs could come under pressure if the RBA begins to tighten, as real estate stocks are also historically sensitive to cash rate moves.
So, if you're buying ASX shares with higher rates in mind, you might want to run your slide rule over some of the leading consumer staples stocks. These companies sell items we all have to have, regardless of rate moves.
You may also want to consider buying ASX bank shares.
In a recent report, Macquarie Group Ltd (ASX: MQG) revealed that ANZ Group Holdings Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and Commonwealth Bank of Australia (ASX: CBA) shares could all deliver higher earnings per share (EPS) if the RBA hikes interest rates twice in 2026, rather than cutting once.
"This shift in both cash rate expectations and swaps suggest material upside to bank margins if it's sustained," Macquarie noted.
