Australian stocks sank sharply on Thursday, as a jump in oil prices and renewed concern over higher interest rates sent a wave of caution through the market.
By 11.55am, the S&P/ASX 200 had dropped 163.80 points, or 1.8 per cent, to 8747.60, leaving the benchmark index on course for its steepest one-day fall since March and erasing about $58billion in market value.
The broad sell-off deepened as traders raised expectations that stubborn inflation could force the Reserve Bank to keep tightening policy.
Investors are now pricing in a 79 per cent probability of a rate rise this month, up from 64 per cent earlier in the week, while another increase by mid-2027 is now fully reflected in market pricing.
‘Oil is smashing the Australian share market,’ said Global X ETFs investment strategist Justin Lin.
‘Investors are being forced to confront the prospect that inflation could remain higher for longer and that the Reserve Bank of Australia may have more work to do.’
Oil prices surged above $US101 a barrel amid further attacks on oil tankers in the Strait of Hormuz, raising fears that higher energy costs could push inflation even higher.
The Reserve Bank will make its next interest rate decision on September 29.
Russel Chesler, VanEck’s head of investments and capital markets, expects oil prices to stay higher for longer.
‘The continuing Middle East conflict is showing no signs of a resolution and that will leave the RBA with no choice but to increase rates at its meeting later this month,’ he said.
RBA assistant governor Sarah Hunter also did little to downplay expectations that the bank could lift interest rates again if inflation continued to exceed its forecasts.
‘I think the board has been pretty clear, and the staff as well. I’m certainly myself pretty clear that inflation is top priority right now,’ she told the AFR Property Summit in Sydney.
‘Inflation is above target and has been for some time.
‘We are concerned about inflation and if there is a sense that inflation is going to be stronger than we think in the context of our forecast, then the board may well have to raise interest rates to tackle that.’
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Both headline and trimmed mean inflation came in above the RBA’s forecasts in July, adding to concerns that price pressures remain stubborn.
At the same time, business conditions took a tumble in August, with profitability falling 10 points to its lowest level since the pandemic, NAB’s monthly business survey showed on Tuesday.
How much of those higher costs businesses are able to pass on to consumers will help determine how persistent inflation remains.
That, in turn, will depend partly on how willing households are to keep spending as higher interest rates put further pressure on borrowers.
Confidence among mortgage holders plummeted 14 per cent during the month, compared with a 0.9 per cent fall among renters.
‘Interest rate concerns had a clear negative impact on consumers with a mortgage,’ Westpac’s head of Australian macro-forecasting Matthew Hassan said.
The prospect of higher rates is also weighing on the housing market.
HSBC chief economist Paul Bloxham expects nationwide house prices to fall 13 per cent from peak to trough, which would be ‘the largest housing price correction in modern history’.
Already, $34.1 billion has been wiped off Australian property values in the three months ended June, the Australian Bureau of Statistics reported, following changes to negative gearing and soaring interest rates.
Despite the fall, the total value of Australian dwellings remains a whopping $12.7 trillion following decades of strong growth.
Housing Minister Clare O’Neil has also pointed to the growing difficulty younger Australians face getting onto the property ladder, saying a low-income young couple is now half as likely to own their own home as they were 45 years ago.
‘That tells us that what’s going on with housing in Australia is not just about a roof over people’s heads,’ she told the AFR Property Summit.
‘This is fundamentally changing what aspiration means in our country.’