Australian share market sheds $45billion in value after US Fed warns higher rates here to stay

The Australian share market has lost more than $45billion in opening trade after US Federal Reserve chairman Jerome Powell warned higher rates were here to stay.

The benchmark S&P/ASX200 opened 1.74 per cent weaker on Monday as investors on the Australian Securities Exchange reacted badly to his Friday night speech.

Mr Powell had told the Jackson Hole central bank symposium in Wyoming that higher interest rates were needed to tackle some of the worst American inflation in four decades.

‘Restoring price stability will likely require maintaining a restrictive policy stance for some time,’ he said.

‘The historical record cautions strongly against prematurely loosening policy.’

The Commonwealth Bank, Australia’s biggest home lender, fell 1.7 per cent to $96.62. 

Buy now, pay later app Zip Co plunged 5 per cent to just 86 cents after last week revealing a $1.1billion full-year loss.

The Australian share market’s losses are still moderate compared with Wall Street where the Dow Jones Industrial Average on Friday night finished 3 per cent weaker. 

Mr Powell had warned tighter monetary policy in the world’s biggest economy was needed to tackle the worst price pressures in four decades.

‘Reducing inflation is likely to require a sustained period of below-trend growth,’ he said. 

U.S. inflation in the year to July soared by 8.5 per cent but this was less severe than June’s 9.1 per cent level – the steepest since 1981. 

‘While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what (we) will need to see before we are confident that inflation is moving down,’ Mr Powell said.

Commonwealth Bank chief economist Stephen Halmarick is expecting the US Fed’s Federal Open Market Committee to raise its target interest rate by 50 basis points, or half a percentage point, at its September, November and December meetings, taking the federal funds rate to 3.75 per cent to 4 per cent, from 2.25 per cent to 2.5 per cent now. 

That is much higher than the Reserve Bank of Australia’s existing six-year high cash rate of 1.85 per cent. 

The Commonwealth Bank is expecting a 50 basis point Australian cash rate rise in September, followed by a 25 basis point tightening in November – taking it to 2.6 per cent.