Australia shares close at 8-month low as rate hikes in focus

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Jan 25 (Reuters) - Australian shares sank 2.5% on Tuesday to close at their lowest level in more than eight months, as risk-averse sentiment strengthened after a surge in the country's core inflation spurred expectations of a quicker-than-expected rate hike.

The retreat from riskier assets also came ahead of the U.S. Federal Reserve's two-day meeting, with investors starting to speculate that there is a small possibility that they will announce a surprise rate hike. read more

The S&P/ASX 200 (.AXJO) ended down 2.5% at 6,961.6, hitting its lowest close since last May.

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Australia's core inflation accelerated to its fastest annual pace since 2014 in the December quarter, data showed on Tuesday. read more

"With a rather clear case that the Reserve Bank of Australia (RBA) is making progress towards its goals of full employment and inflation, the RBA will need to re-write the policy narrative," said Prashant Newnaha, senior Asia-Pacific rates strategist, TD Securities.

"We expect the RBA's central forecast to now shift to a hike in 2023, but the RBA will possibly open the door to a rate hike in 2022 if its upside forecasts are realised."

The RBA had earlier said it would maintain record low rates until 2024.

Energy stocks (.AXEJ) were the top drags in the benchmark, tumbling 4.1% to their worst day in 1-1/2 years.

Oil and gas majors Woodside Petroleum (WPL.AX) and Santos (STO.AX) fell 4.5% and 5%, respectively.

Australian tech stocks (.AXIJ) plunged 3.2% to their lowest close since Sept. 2020. Computershare (CPU.AX) and Xero (XRO.AX) lost 3% and 3.6%, respectively.

Shares of U.S.-based buy now, pay later company Sezzle jumped 9.4% after confirming merger talks with larger Australian rival Zip Co (Z1P.AX). read more

New Zealand's S&P/NZX 50 (.NZ50) fell 0.5% to 12,128.21.

Dairy firm a2 Milk (ATM.NZ) climbed 6.2% amid reports that it was a takeover target.

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Reporting by Upasana Singh in Bengaluru; Editing by Sherry Jacob-Phillips

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