Yesterday, The Reserve Bank of Australia (RBA) held its most recent cash rate meeting.
The RBA decided to leave the cash rate at 4.35%.
According to the ABC, the move comes after headline inflation cooled a bit in June. Property prices also declined slightly more than anticipated in recent months.
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What is the cash rate and why is it relevant?
The cash rate is the interest rate set by the Reserve Bank of Australia (RBA). It influences other interest rates across the economy, including borrowing and savings rates.
When the cash rate rises, borrowing becomes more expensive. This can reduce consumer spending and business investment and put pressure on company profits and ASX share prices.
When it falls, the opposite generally occurs, supporting economic activity and share valuations.
While this isn't a hard and fast rule, monitoring the cash rate is important for ASX investors. It can influence borrowing costs, economic growth, company profits and ultimately share prices.
What else did the RBA say?
According to reports, the RBA also updated its inflation targets for 2026.
The RBA's preferred measure of inflation, the trimmed mean, is expected to reach 3.3% by the end of 2026, down from the previous forecast of 3.5%.
It's expected to hit the mid-range of the RBA's 2-3% target by early 2028, with headline inflation also expected to fall into the mid-range around the same time.
This is also good news for investors, as high inflation can put pressure on ASX shares.
High inflation often leads to higher interest rates, which increases borrowing costs and can reduce company profits and share valuations.
However, some sectors, such as resources and companies with strong pricing power, may be better positioned to cope with inflation.
Where to invest in today's climate?
The monetary policy board's next interest rate meeting will be held on September 28-29.
The current rate remains at its equal highest point since 2011.
In general, higher interest rates tend to favour banks and some defensive sectors, while putting pressure on property, consumer discretionary and highly leveraged companies because borrowing becomes more expensive.
When the cash rate falls, sectors such as property, consumer discretionary, technology and other growth-oriented companies often benefit because borrowing costs fall and investors become more willing to pay for future growth.
For investors looking to target bank shares, one option to consider is the VanEck Australian Banks ETF (ASX: MVB).
It gives investors exposure to a diversified portfolio of ASX-listed banks and financial institutions.
If inflation falls and the RBA responds with rate cuts, growth, property and consumer-related shares are often among the areas to watch.
For investors optimistic about lower inflation, an ASX ETF to consider could be the Vanguard Australian Property Securities Index ETF (ASX: VAP).
It includes a diversified blend of Australian real estate investment trusts (A-REITs) with residential, office, retail, and industrial assets.
