Australian shares have closed lower as investors reduce their expectations of a May interest rate cut.

Expectations of an interest rate cut were lowered after underlying inflation, which strips out the effects of volatile price movements, indicated an annual rate of 2.35 per cent which is well within the Reserve Bank’s target range.

That caused the sharemarket to slump from flat to 0.80 per cent lower and the Australian dollar to bounce almost half a US cent to 77.60 US cents.

OptionsXPress analyst Ben Le Brun said it had been another disappointing day for the market, with most sectors finishing deeply in the red.

“The inflation gauge clearly didn’t give the market what is was hoping for, which was the potential to price in an interest rate cut from the Reserve Bank,” Mr Le Brun said.

He said interbank futures markets were slowly pricing that idea out.

“That’s why we’re seeing some of the high-yielding sectors, in particular in the financials and in the property trust space, coming under pressure.”

Commonwealth Bank was down 66 cents at $91.12, National Australian Bank lost 47 cents to $38.11, ANZ was down 27 cents at $35.49 and Westpac dropped 50 cents to $38.29.

BHP Billiton shares dropped after it lifted full year iron ore guidance by two per cent to 250 million tonnes, in spite of Wednesday’s solid production numbers.

BHP shed 33 cents to $30.27, Rio Tinto was down 30 cents to $55.20 while iron ore miner Fortescue was 3.5 cents higher at $1.90.

Energy stocks fell as oil prices slid, with Woodside down 17 cents to $34.52 while Santos lost 14 cents to $7.74.

KEY FACTS

* At the close on Wednesday, the benchmark S&P/ASX200 index was 34.8 points, or 0.59 per cent, lower at 5,837.5.

* The broader All Ordinaries index was down 31.2 points, or 0.53 per cent, at 5,812.8, according to preliminary figures.

* The June share price index futures contract was 51 points lower at 5,826, with 24,710 contracts traded.

* National turnover was 1.8 billion securities worth $5.2 billion.