AUSTRALIAN shares dropped more than 1 per cent on Friday and were on track for their worst week in over a year, as the US Federal Reserve indicating that interest rates would remain higher for longer than expected weighed on sentiment.

The S&P/ASX 200 index retreated 1.2 per cent to 6,978.5 by 0038 GMT, set for a fifth session of declines. For the week, it fell 4.3 per cent, on track for its worst week since June 17, 2022.

Globally, investor sentiment was dampened after the US Federal Reserve earlier this week struck a more hawkish tone than expected and signalled another rate hike this year and more stringent monetary policy through 2024 to fight inflation.

In Australia, focus now shifts to August inflation and retail sales data due next week for insights into how the economy has adjusted to the aggressive rate hikes by the central bank.

Heavyweight mining stocks dropped 1.6 per cent in a fifth straight session of declines, on track for their worst day since Sept 7. Mining behemoths BHP Group, Rio Tinto and Fortescue fell more than 2 per cent, each.

Rate-sensitive financial stocks retreated 0.8 per cent to their lowest level since Aug 28. The ‘big four’ banks fell between 0.9 per cent and 2.0 per cent.

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Energy stocks fell 0.9 per cent to their lowest levels since July 21. For the week, the sub-index fell 5.6 per cent and was on track for its worst week since March 10.

Gold stocks retreated 1.3 per cent, falling for a third straight session, to their lowest level since Sept 14.

Costa Group Holdings rose 6.4 per cent to become the top gainer on the benchmark index, after the horticulture company said it had entered an agreement to be bought out by a US private-equity firm Paine Schwartz Partners led consortium in a deal valuing it at A$1.50 billion (S$1.32 billion).

New Zealand’s benchmark S&P/NZX 50 index retreated 0.7 per cent to 11,237.86. REUTERS