Where I’d invest in ASX shares if the RBA increases the interest rate

2025 was the year of multiple RBA interest rate reductions, with three rate cuts. However, some economists think the RBA could raise interest rates in 2026. If that happens, there are a few ASX shares I’d keep my eyes on.

I regularly talk about ASX shares that I’m bullish about, such as Xero Ltd (ASX: XRO) and TechnologyOne Ltd (ASX: TNE). I still think they (and other ASX growth shares) are opportunities.

But there are a few ASX shares that could become more attractive after an RBA rate cut.

RBA rate cut beneficiaries

There are some businesses that could see an earnings increase due to how they generate earnings or with the amount of cash that they have on their balance sheet.

For example, Computershare Ltd (ASX: CPU) holds a significant amount of client cash and generates interest income from that. Any rate rises would be a very helpful boost for earnings. There are other, smaller businesses that also hold significant cash balances (for their size). But, the actual investment must make sense too, not just the fact that it holds cash.

The broker UBS recently commented in a note that ASX bank shares could benefit from a rate rise if it means stronger lending margins (with an increase in the net interest margin (NIM) metric). UBS said:

Upside risk [potential boost] to EPS with cash interest rates forecast to increase 50bps in 2026, possibly contributing to a stronger-than-anticipated NIM performance and revenue growth for major banks, exceeding consensus expectations. Core earnings may also benefit from higher-than-expected loan growth, while banks are actively managing persistent cost pressures, which are ~+6.0% on an underlying basis.

With that note, UBS upgraded National Australia Bank Ltd (ASX: NAB), Macquarie Group Ltd (ASX: MQG), and Bank of Queensland Ltd (ASX: BOQ) to a buy. NAB is the only major ASX bank share that UBS rates as a buy, with the next major bank choice being Westpac Banking Corp (ASX: WBC) with a neutral rating.

Businesses with debt and ASX retail shares

I’m not expecting history to repeat itself exactly, but it wouldn’t be a surprise if certain rate-sensitive businesses suffer a share price decline because it could hurt profitability. I like to take advantage of declines in businesses like this, thanks to the lower valuation and the potential for a bounce back.

For example, real estate investment trusts (REITs) may suffer because of the increase in interest costs (and the headwind for real estate values). I’d be looking at names like Charter Hall Long WALE REIT (ASX: CLW), Centuria Industrial REIT (ASX: CIP), and Rural Funds Group (ASX: RFF).

I’ll also keep an eye on a number of ASX retail shares – if they decline due to consumer worries, they could be particularly good cyclical opportunities to buy for the long term. I’m thinking of names like Temple & Webster Group Ltd (ASX: TPW), Lovisa Holdings Ltd (ASX: LOV), Wesfarmers Ltd (ASX: WES), and Nick Scali Ltd (ASX: NCK).

Volatility can prove to be a positive for investors to take advantage of, so if there is market negativity, then I’ll be ready. But it’s possible there may not be any declines at all.

The post Where I’d invest in ASX shares if the RBA increases the interest rate appeared first on The Motley Fool Australia.

More reading

• In a hot market, the undervalued Australian shares to buy now
• Here’s what Westpac says the RBA will do with interest rates next week
• 2 ASX growth shares I’d buy today for growth and income
• How to turn $250 a month into a $500,000 ASX share portfolio
• 3 ASX 200 shares trading at 52-week lows: Are they a buy?

Motley Fool contributor Tristan Harrison has positions in Rural Funds Group, Technology One, and Temple & Webster Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa, Macquarie Group, Technology One, Temple & Webster Group, Wesfarmers, and Xero. The Motley Fool Australia has positions in and has recommended Macquarie Group, Rural Funds Group, and Xero. The Motley Fool Australia has recommended Lovisa, Nick Scali, Technology One, Temple & Webster Group, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.