Australian shares extended losses on Tuesday as the central bank raised interest rates by a bigger-than-expected 25 basis points and flagged prospects of more hikes to contain rising inflationary pressures.

The S&P/ASX 200 index closed 0.42% lower at 7,316.2, declining for the second straight session.

Rising inflation forced the Reserve Bank of Australia (RBA) to lift its cash rate just before a federal election, while also keeping room for further tightening as it runs down the curtain on pandemic stimulus.

"The central bank did not wait for federal elections or March-quarter wages data due this month before raising interest rates. This has fuelled speculations that the RBA could take a more aggressive approach to cash rate in the coming months," said Kunal Sawhney, chief executive officer of Kalkine Group.

As most economies stage a strong rebound from COVID-19 lockdowns, central banks are under increasing pressure to halt the rise in inflation. The Reserve Bank of New Zealand earlier this year tightened cash rate by 25 basis points, while the Canadian central bank also increased policy interest rate to 0.5% from 0.25%.

Now, investors keenly await the U.S. Federal Reserve meeting this week where it is widely expected to raise rates by 50 basis points.

Deep Data Analytics' chief executive officer, Mathan Somasundaram, said the Fed was likely to raise rates by 50 bps on Wednesday night after the RBA's 25 bp hike.

In Australia, losses were led by a 1.1% drop in miners on weak iron ore prices, with heavyweights BHP, Rio Tinto and Fortescue Metals retreating between 0.5% and 4.7%.

Financials dropped 0.3%, with Commonwealth Bank of Australia and National Australia Bank giving up 0.4% and 0.7%, respectively.

Meanwhile, shares of Woolworths rose 0.6% after the company reported a 4.4% jump in food sales for the third quarter.

New Zealand's benchmark S&P/NZX 50 index fell 0.9% to 11,675.9.

 

(Reporting by Roushni Nair in Bengluru; Editing by Subhranshu Sahu)