Here's what an interest rate of 0.1% means for ASX shares

The Reserve Bank of Australia (RBA) has just announced that interest rates will be cut to an all-time low of 0.1%. Here's what that means

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Well, it's official. The Reserve Bank of Australia (RBA) has just done what it's threatened to for months and cut the official cash rate to yet another record low. Interest rates were already at unprecedented, record lows at the old rate of 0.25%, where they have been sitting since March. Today's moves put a new meaning to the phrase 'record low'.

So much is being made of this move, but what does it really mean for savers, investors and ASX shares?

Consequences of 'record low' interest rates

Let's be frank, a cash rate of 0.1% is essentially zero. It means that the cost of borrowing money has never been cheaper, at least in modern history. Those looking to borrow money, or buy a home (or who have already done so) should be especially thankful. And this is true in real terms as well, not just nominally. Inflation is also at record lows. The RBA also told us today that it foresees inflation staying at around 1% per annum in 2021, only rising to 1.5% in 2022. That means a mortgage with an interest rate of 2% in 2021 will really be a loan with a 1% interest rate in real terms. That's cheap money.

So this move today is great news for borrowers. But what does this mean for savers? Well, it's very dire. Bank accounts are already offering next-to-nothing in terms of interest rates. And this move is likely to further put pressure on margins. I wouldn't be surprised if you can't find a savings account or term deposit with an interest rate above 1% by the end of the year.

If we consider this paradigm in conjunction with what we just discussed about inflation, it is even direr. If inflation is 1% in 2021, and a bank account pays you 1% in interest, your money is effectively going nowhere. In fact, it will be going backwards in real terms when you pay your required tax on the interest earned.

TINA TINA Bobina

Enter TINA – the acronym that has come to define investing in the age of the coronavirus. TINA stands for 'There Is No Alternative', and perfectly sums up why this move is good for the S&P/ASX 200 Index (ASX: XJO) and the shares within it.

No one wants to have their cash sitting 'safe' in the bank, but losing real purchasing power every year. As such, all but the most risk-averse investors are likely going to be using either the share market or the property market to try and boost their portfolio's returns. There is simply no other option, seeing as cash and government bonds are rendered almost worthless by interest rates being at near-zero.

That should provide a tailwind for the entire share market, which will last until rates begin rising again. And, if we take what the RBA has said today, that's not coming anytime soon.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A man looking at his laptop and thinking.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors finished the trading week on a sour note today.

Read more »

Happy teen friends jumping in front of a wall.
Share Gainers

4 ASX 200 stocks smashing the benchmark this week

Investors are sending these four ASX 200 stocks soaring this week. But why?

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Broker Notes

Bell Potter says this growing ASX 200 stock can rise over 40%

Big returns could be on the cards for buyers of this stock.

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Share Market News

Which delivered superior returns in FY25: CSL, A2 Milk, or Telstra shares?

We review the share price growth and dividend income delivered to investors in FY25.

Read more »

Woman with an amazed expression has her hands and arms out with a laptop in front of her.
Share Gainers

Why IGO, Johns Lyng, Lynas, and Web Travel shares are pushing higher today

These shares are ending the week on a high. But why?

Read more »

Person with thumbs down and a red sad face poster covering the face.
Share Fallers

Why Imricor, Ora Banda, Ventia, and Vulcan shares are dropping today

These shares are ending the week in the red. But why?

Read more »

Man with rocket wings which have flames coming out of them.
Resources Shares

Up 23% today, why Macquarie forecasts this ASX 200 mining stock could rocket another 33%

Macquarie forecasts more outsized gains to come for this surging ASX 200 mining stock.

Read more »