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Australian shares have had a sluggish start to the new financial year as market focus shifted to signals from global central banks that interest rates are likely to remain high well into 2024.

A slowing Chinese economy, elevated levels of inflation and reduced consumer spending due to the cost-of-living crisis are also weighing on the local market. Rising long-term bond yields have also contributed to the tough financial conditions as investors now expect high interest rates to remain for some time.

The Australian Retailers Association attributed the decline in retail sales volume to lower demand at a time when wages, rents, insurance, utilities, the supply chain and materials are all increasing in cost.

The S&P/ASX 200 Index slipped around 2 percent in the three months to September 30, weighed down by technology, healthcare, consumer staples and materials, while bright spots could be found in the financial and energy sectors.

Economic indicators

The economy slowed at an annual rate in the June quarter to grow by 2.1 percent from 2.4 percent in the March quarter. A boost to net exports and more tourists helped support the latest quarterly figures.

On the inflation front, the August consumer price index jumped for the first time in four months by 5.2 percent due to rising fuel costs and rents. While inflation is down from December’s 8.4 percent peak, the sudden increase may mean that the cycle of rising interest rates is not over. 

While Australian interest rates have remained unchanged at 4.1 percent for four consecutive months, the US Federal Reserve and the Bank of England recently indicated that interest rates would remain higher for longer and that has spooked investors.

The new Reserve Bank of Australia governor Michele Bullock said she was “reluctant to give any sort of predictions on how long interest rates might have to stay high”, but there is the prospect that the central bank may be forced to raise interest rates to tackle inflation.

“In Australia’s case, all I can say is that we may have to raise interest rates again. But we’re watching the data very carefully and we’ll be taking decisions – for the time being, until next year at least – month by month,” she said.