ORG Origin Energy Limited

By Robb M. Stewart

MELBOURNE--Australian shares were led lower in late trading Wednesday by banks amid heightened uncertainty over interest rates.

The market opened modestly higher in the wake of an overnight recovery in oil prices, then built on gains to peak about midday following the release of data showing the first quarter of domestic deflation since the global financial crisis. That turned to selling as analysts reflected on the increased likelihood the Reserve Bank of Australia would next week lower interest rates, faced with the risk that inflation will undershoot its 2%-3% target for a sustained period.

Falling for a third straight session, the S&P/ASX 200 lost 32.9 points, or 0.6%, to end at 5187.7. After helping push the market higher early in the day, the financial sector finished down 1.2%.

Analysts said there is a high degree of uncertainty dogging equity markets amid U.S. earnings season and ahead of the U.S. Federal Reserve's monetary policy update. The Fed isn't expected to raise interest rates on Wednesday but may offer clues as to whether it will act in June. Australia's largest banks, which account for a big chunk of the ASX 200's value, are also due to turn in their earnings reports from Monday.

Australian consumer prices fell 0.2% in the first three months of this year and were up 1.3% from a year earlier, the Australian Bureau of Statistics said Wednesday. Economists had expected consumer prices to rise 0.2% in the quarter and 1.7% from a year earlier.

"While we don't think there is a screaming need for interest rates to be cut on economic activity grounds, the low inflation result opens the door for the Reserve Bank to cut rates if they deem it is necessary," Commonwealth Securities economist Savanth Sebastian said.

Commonwealth Bank of Australia led the big banks lower, falling 2.5%. National Australia Bank Ltd. was 2.2% lower, Westpac Banking Corp. lost 2% and Australia & New Zealand Banking Group Ltd. shed 1.5%. Regional banks Bendigo & Adelaide Ltd. and Bank of Queensland Ltd. slipped 1.4% and 2.5%, respectively.

"Next week's bank profit reports are now close enough to keep investors cautious," CMC Markets chief market analyst Ric Spooner said. "Markets are waiting for clarity on bank bad debt provisions and whether interest margins have been sustained in the face of increased competition."

Among mining stocks, BHP Billiton Ltd. lost 0.6% while fellow iron-ore producers Rio Tinto Ltd. and Fortescue Metals Group Ltd. fell 2.1% and 2.9%.

Woodside Petroleum Ltd. dropped 2.8% but Santos Ltd. gained 2% and Origin Energy Ltd. added 2.1%.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

April 27, 2016 03:41 ET (07:41 GMT)

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