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The Australian share market is closing out the year well off its lows, hovering around a six-month peak despite interest rates at their highest level since 2012.

Expectations that the pace of interest rate rises will ease in 2023, as well as demand for resources and bank stocks, have underpinned the S&P/ASX 200 in recent months.

Australian shares have rallied around 5 percent since mid-September and are down around 3 percent for calendar 2022 as of mid-December.

Inflation dip

A dip in the annual headline inflation rate to 6.9 percent also resulted in a smaller increase in the official cash rate at the start of December. Consumer prices eased due to a sharp fall in food prices, especially fruit and vegetables, along with a decline in holiday and accommodation costs.

The Reserve Bank of Australia (RBA) has forecast that movements in the official cash rate – currently sitting at a 10-year high of 3.1 percent – will likely fluctuate over coming years due to erratic inflation figures as climate change, an ageing population and supply chain stress add to price pressures.

The central bank said events of the past year had revealed supply-side issues were going to make inflation more variable and the setting of interest rates harder to manage.

The RBA said it expected to increase interest rates “over the period ahead” but would be guided by incoming economic data. It has forecast inflation will hit 8 percent this month before slowly falling over the next two years.

Economic resilience

The resilience of the Australian economy was underscored by the latest GDP and unemployment figures showing that labour market conditions remain tight despite eight consecutive interest rate increases.

Economic growth in the September quarter came in at 0.6 percent for an annual rate of 5.9 percent. The strong result was driven by a rebound in consumer spending as the nation came out of the final wave of the COVID-19 lockdowns. However, market economists expect Australians to start restricting their spending following the sharp increase in interest rates.

The jobless remained at 3.4 percent in November – its lowest rate in almost 50 years – as the labour market added more jobs and workers accrued additional hours.

Unemployment has plunged since its July 2020 high of 7.5 percent. It last hit 3.4 percent in July and October, but has remained below 4 percent since March 2022.