The Australian sharemarket hit a downdraft when the Reserve Bank of Australia raised interest rates by a surprisingly large 25 basis points yesterday, as the markets digested the implications of rising debt costs.
The ASX 200 dropped 0.4 per cent, or 30.8 points to close at 7316.2 with tech stocks, the health care and industrials the only sectors to close in the black. Miners like BHP, Fortescue and Rio sunk after iron ore prices slumped overnight. Fortescue led the declines with a 4.8 per cent share price drop and Rio Tinto closed 1.5 per cent lower.
Finance stocks also took a hit with ratings agency Standard & Poor's saying home loan arrears are likely to drift up from historically low levels following yesterday's increase in interest rates.
Russel Chesler, head of investments at VanEck, said higher credit costs are likely to dent big bank profits.
"Locally, we are likely to see the big banks come under pressure in the month ahead as higher rates dent the banks' earnings from mortgages and bad debts could jump on higher credit costs." He expects companies which act like an inflation hedge, like gold and infrastructure, are likely to outperform. And despite the drop yesterday, rising commodity prices are expected to support the big miners through 2022.
"In this environment, with inflation running hot and interest rates rising, companies, including cyclical stocks, that can increase their prices and keep their customers at the same time, are likely to outperform," he said.
In other news, the chief executives of Australia's two largest private employers, Woolworths and Wesfarmers have thrown their support behind an increase in workers' wages amid persistently rising inflation and a tightening labour market.
There was also good news about the pandemic recovery, Transurban chief executive Scott Charlton said toll-road traffic has fully rebounded in Australia and is almost at normal levels in the US as businesses and consumers emerge from the pandemic.
