Australian shares plummeted on Thursday, with the S&P/ASX 200 index falling 1.8 percent to 8747.60 by mid-morning, marking its steepest decline since March 9. The sell-off was driven by heightened investor expectations of additional interest rate increases, fueled by persistent inflation and a sharp rise in oil prices.
Markets are now anticipating a 79 percent probability of a rate hike by the Reserve Bank of Australia (RBA) this month, an increase from 64 percent earlier in the week, with another hike fully priced in by mid-2027. Global X ETFs investment strategist Justin Lin noted that oil prices, which surged above $US101 a barrel following attacks on oil tankers in the Strait of Hormuz, are significantly impacting the market. He indicated that investors are confronting the possibility of prolonged higher inflation, requiring the RBA to take further action.
Russel Chesler, VanEck's head of investments and capital markets, anticipates oil prices will remain elevated due to the ongoing Middle East conflict, suggesting the RBA may be compelled to raise rates at its upcoming meeting on September 29. RBA assistant governor Sarah Hunter reinforced this sentiment, stating that inflation remains above the bank's target and is a "top priority." She indicated that if inflation proves stronger than forecasted, the RBA might have to increase interest rates.
Concerns about stubborn price pressures are compounded by recent economic data. Both headline and trimmed mean inflation figures in July exceeded the RBA's forecasts. Additionally, NAB's monthly business survey revealed a significant drop in business conditions in August, with profitability falling to its lowest level since the pandemic.
The ability of businesses to pass on higher costs to consumers, and consumer willingness to spend amid rising interest rates, will be crucial in determining inflation's persistence. Confidence among mortgage holders has already seen a sharp decline of 14 percent, according to Westpac's head of Australian macro-forecasting Matthew Hassan, who highlighted the negative impact of interest rate concerns on borrowers.
The prospect of continued rate hikes is also casting a shadow over the housing market. HSBC chief economist Paul Bloxham forecasts a potential 13 percent fall in nationwide house prices from their peak, which would represent the most significant housing price correction in modern history. Australian property values have already decreased by $34.1 billion in the three months leading up to June, according to the Australian Bureau of Statistics, attributed to changes in negative gearing policies and increasing interest rates. Despite this, the total value of Australian dwellings remains substantial at $12.7 trillion. Housing Minister Clare O'Neil has pointed to the increasing difficulty for young Australians to enter the property market, noting that a low-income young couple is now half as likely to own a home as they were 45 years ago, fundamentally altering national aspirations.