With inflation back on the boil and the Reserve Bank of Australia pulling the trigger on multiple interest rate hikes, should you still buy ASX shares?
I won't leave you hanging.
While higher costs and rates will impact market dynamics, my answer remains a resounding yes.
But you may wish to target a different basket of ASX shares than you might buy in a falling rate environment.
We'll look at a few you may want to consider adding to your portfolio below.
But first…
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What on earth is happening with interest rates in Australia?
Inflation down under was already ticking higher in the latter months of 2025 and into 2026 before the onset of the Iran war at the end of February.
That resurgent inflation was partially spurred by greater capacity pressures. But with energy costs rocketing amid the Middle East conflict, cost of living pressures are likely to ramp significantly higher before we see any relief.
In an effort to get ahead of the curve, this saw the RBA boost Australia's official interest rate by another 0.25% on Tuesday. This third consecutive hike from the central bank sees the official interest rate at 4.35%. That's back at its 2024 peak, and it matches the highest rate levels since 2011.
While many ASX shares initially sank on the RBA's afternoon announcement on Tuesday, the All Ordinaries Index (ASX: XAO) clawed back those losses to close the day around where it was before the rate hike news hit the wires.
Buying ASX shares in a higher interest rate environment
Commenting on the RBA's latest interest rate increase, and how investors should respond, Josh Gilbert, lead analyst for APAC at eToro, said:
The takeaway for portfolios is that boring can be brilliant in this environment. Focus on quality balance sheets and pricing power, because companies that can pass costs through without losing volume are the ones that can hold up best with the current macro backdrop.
One ASX share that looks to fit this bill is Transurban Group (ASX: TCL).
While the toll road owner and operator won't be immune to the impacts of higher energy prices on its traffic volumes, Transurban is able to increase prices to match inflation across many of its toll roads. Indeed, the company reported that more than 90% of its revenue is either CPI-linked or with fixed escalations.
Other ASX shares that could perform well amid rising inflation and rates are insurance stocks.
Companies like QBE Insurance Group Ltd (ASX: QBE) and Suncorp Group Ltd (ASX: SUN) generally hold a sizeable pool of cash and bonds, which should offer an income boost amid higher interest rates.
And don't lose track of the Aussie dollar.
With Australian interest rates outpacing those in the United States, the Aussie dollar hit four-year highs this week, recently trading for 72.4 US cents. That's up from 64.3 US cents a year ago.
This big shakeup in currency exchange rates should tend to favour importers over exporters. Imported goods will be cheaper in Aussie dollar terms while exported goods will be more expensive for buyers paying in US dollars.
