The Australian share market continued heading south amid warnings that central banks have lost control of inflation

The Australian share market continued its downward slide, losing $128bn in two days as experts warned central bankers had lost control of the ability to tame inflation.

Two consumer confidence surveys released Wednesday revealed dramatic declines in sentiment. Picture: NCA NewsWire / Jeremy Piper

The Australian share market continued its downward slide Wednesday as analysts warned that central bankers had lost control of the ability to tame inflation.

Health care, energy and technology stocks were among the biggest losers, with the ASX 200 falling sharply at the opening bell and, despite a mid-day rally, shedding 1.27 per cent to close at 6601.

The broader All Ordinaries tumbled 1.4 per cent to 6485.8 points on Wednesday after a 3.7 per cent dive on Tuesday, wiping $128bn off its value in two days.

That followed the worst plunge in two years on Tuesday, as growing fears of rising inflation, interest rate hikes and looming recession spooked investors.

Ahead of an expected interest rate rise in the US this week, Reserve Bank governor Philip Lowe forecast in a rare television interview that inflation would hit 7 per cent by the end of the year. He said the cash rate could reach 2.5 per cent, up from its current 0.85 per cent.

Reserve Bank governor Philip Lowe

Meanwhile, two consumer confidence surveys released Wednesday revealed dramatic declines in sentiment, while the Fair Work Commission granted a 5.2 per cent pay rise to 2.7 million of the lowest paid workers starting July 1.

Nathan Bell, head of strategy at InvestSMART, said he expects the market volatility which started at the beginning of the year will continue to linger in the near term as a result of “more economic surprises, more shock and awe from central banks and more pain from inflation’’.

“Central banks have lost control of inflation. They’re now trying to catch it,’’ Mr Bell said.

“Markets are trying to price 12 months ahead. The fear factor is that the central banks will lose control and try to catch inflation at the cost of economic growth and a recession.’’

Despite an unemployment rate at a near 50-year low and robust economic growth, Mr Bell said the risk of a recession in Australia was “quite high’’ because rate rises will trigger a decline in consumption, which accounts for about two-thirds of GDP.

Damien Klassen, chief investment officer with Nucleus Wealth, said an array of factors was driving inflation higher, including rising energy costs, food shortages, the war in Ukraine and weather-related disruptions.

But he said the biggest issue driving fears over inflationary pressures was wage rises.

Mr Klassen warned that central banks may go too far in their zeal to squash inflation.

“The danger is that they try and stamp it out too hard and what they effectively do is end up smashing demand to bring it down,’’ he said.

“We think they will overcook it. Most of the time when they raise rates it goes too far. They talk about ‘soft landings’ but it almost never happens.’’

The next threat facing investors is earnings. “Company earnings are going to start weakening and that will lead to further downside,’’ Mr Klassen said.

He also warned that if mortgage rates exceed 7 per cent, Australia would almost certainly fall into recession.

“If there’s a global recession, the Australian commodities typically will get hit really hard,’’ Mr Klassen said, noting that demand from China had already slowed as it continues to suffer from Covid lockdowns.