Tomorrow the Reserve Bank of Australia will make its call on the cash rate, which currently sits at 4.35%.
The RBA has raised the cash rate three times already in 2026.
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Why is the cash rate influential for ASX shares?
For the average punter, the cash rate target affects how much Australians pay to borrow money and how much they earn on savings.
When the cash rate goes up, mortgage repayments and loan costs usually increase, while savings accounts often pay more interest.
When the cash rate goes down, borrowing becomes cheaper, which can boost spending and help support the economy.
The RBA cash rate can also significantly influence share prices on the S&P/ASX 200 Index (ASX: XJO) and the broader Australian share market.
When rates rise, borrowing becomes more expensive for companies and consumers, which can reduce profits and spending. This often puts downward pressure on share prices, especially for growth companies.
When rates fall, businesses and households can borrow more cheaply, which may boost profits and economic activity. Investors may also move money from low-yield savings accounts into shares, supporting stock prices.
While it's not always the case, generally, higher rates tend to be a headwind for shares, while lower rates are generally supportive of the share market.
What are the big four banks expecting tomorrow?
Experts and economists are expecting tomorrow's RBA meeting to result in a hold of the cash rate.
This is supported by the big four banks, who also expect a rate hold this month.
Taylor Nugent, senior economist at NAB, said (via Reuters) that the chance of a move at the June meeting is very low.
He commented:
The RBA has now recalibrated policy and we're seeing evidence it was enough to get on top of domestically driven inflation pressures. That means the RBA can sit and hold from here while it assesses risks to inflation and growth coming out of the conflict in the Middle East.
According to Canstar, there are differing opinions on the long-term outlook from the big four banks.
Westpac believes there will be further hikes to come in the back half of 2026, while the other major banks expect the next change to be cuts in 2027.
What does a hold mean for ASX bank shares?
It has been a tough year so far for ASX bank shares.
At the time of writing, year to date:
- Commonwealth Bank Of Australia (ASX: CBA) shares are down 1%
- National Australia Bank (ASX: NAB) is down nearly 14%
- Westpac Banking Corporation (ASX: WBC) is down 10%
- ANZ Group (ASX: ANZ) shares have fallen 6%.
At current valuations, bank shares are viewed as already trading at a premium.
However, a hold decision (on the cash rate) could provide some optimism that the worst is over.
The RBA's commentary around this decision is likely more important than the decision itself.
A hold with a dovish outlook (hinting at future cuts) will likely support the broader market.
However a hold with a hawkish outlook (tipping further hikes) could put more downward pressure on bank shares.
