By now, you'd probably be aware that the Reserve Bank of Australia (RBA) increased interest rates yesterday. The RBA's 25-basis-point hike was the third time interest rates have been increased in 2026. The new cash rate of 4.60% is the highest Australians have seen since late 2011. This move has profound implications for ASX shares and Australian investors. So let's get into how we should be investing in a high-rate world.
Most people associate an interest rate hike with higher mortgage payments. Whilst that is probably the most obvious and painful consequence of a rise in interest rates, there are other consequences as well.
The RBA made this move in order to tame the sticky inflation that has crept into the Australian (really the global) economy. Yes, higher interest rates mean that banks and other lenders must charge higher interest rates of their own on mortgages, business lending, and other lines of credit. But it also works to encourage saving over spending by bumping up the interest rates we can receive on products like term deposits, savings accounts, and government bonds.
As such, higher rates have traditionally been bad news for the share market. For one, they slow economic activity, which increases pressure on any company trying to extract profits from the Australian economy. For another, investors have a higher incentive to leave their cash in a safe investment like a term deposit, rather than risking it on the share market.
Higher rates also tend to have an impact on how investors value ASX shares, and not in a good way. But we'll leave that for another time.
So how does one invest in this kind of environment? Well, I can only tell you what I'm doing.
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ASX shares or cash?
For starters, I am not selling out of any of my high-conviction ASX share investments. The data consistently tells us that the share market is the place where the best investing returns are generated. That's irrespective of how high or low interest rates are.
Saying that, I have slowed down my buying. With a safe, risk-free return of what is now approaching 5.5% from many savings accounts, I am keeping more of my cash in the bank. I think this is prudent, given what is going on in the world right now. I don't know what the future holds. But I do know that periods of high interest rates have often ended in recessions in the past. Thus, it makes sense to take advantage of these high rates while we can, and perhaps deploy that cash into more ASX shares once rates start falling.
I won't be putting the majority of my capital into cash. International and ASX shares will remain the core of my investing portfolio for a long time to come. However, I do think that the relatively high returns that cash offers today are something to note. Depending on your own circumstances, it might be worth another look at the structure of your own portfolio.
