Westpac Banking Corp (ASX: WBC) has brought forward its expectations of when it thinks the RBA will increase interest rates in Australia.
What happened?
According to reporting by the Australian Financial Review, Westpac chief economist Bill Evans believes that the RBA will increase rates in early 2023 with the unemployment rate being stronger than expected.
Mr Evans said in a note:
“It underscores the strength of momentum in the economy and endorses the range of other measures pointing to a very strong labour market.
“The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly.
“Reaching full employment much earlier than previously expected points to upward pressure on both inflation and wages growth.”
According to the AFR, with full employment estimated to be 4%, Mr Evans has forecast underlying inflation will reach 2.25% and wages growth will reach 2.75% by December 2022.
What does this mean for ASX shares?
Interest rates are very important when it comes to putting valuations on shares.
Warren Buffett has said some very wise words about it in the past.
Magellan Financial Group Ltd (ASX: MFG) has this Warren Buffett quote from the 1994 Berkshire Hathaway annual general meeting (AGM):
“The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.”
Mr Buffett also has this quote comparing interest rates to gravity: “Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.” That means higher interest rates theoretically mean lower asset prices.
There are some really interest-sensitive shares like Afterpay Ltd (ASX: APT) and Scentre Group (ASX: SCG) because not only is the valuation affected by rates, but interest is one of the biggest expenses for these businesses too.
ASX growth shares can be affected by this, but they also might have the most growth potential, so that’s where I like to look.
