The Reserve Bank’s “surprise” decision to increase the cash rate by 0.5% has put interest rates back under the spotlight. I say “surprise” because of the 29 economists polled for their predictions, 15 expected the increase to be 0.25%, 11 were at 0.40% and only 3 “smarties” went for the full 0.5%. Moreover, the RBA said that it is going to meet the inflation challenge head-on, which has led many economists to forecast another 0.5% increase in July and some even going for the trifecta with a follow up 0.5% in August. That’s why the share market has sold off since the announcement.

Higher interest rates hurt most stocks in the short to medium term. Firstly, if economic activity slows, then sales can be impacted and if revenue falls, profits and earnings fall. So-called ‘cyclical’ stocks – those that are exposed to the business cycle - are impacted the most.

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