Australian shares close at two-week low as inflation spike sinks rate cut hopes

• Core inflation shock dampens rate-cut bets
• AXJO falls below critical 9,000 points mark
• Financials fall 1.9%; real estate stocks down 1.7%

By Atharva Singh

Oct 29 (Reuters) - Australian shares closed at their lowest level in two weeks on Wednesday as a spike in core inflation dashed hopes of a near-term interest rate cut, prompting a sell-off in banking and real estate stocks.

The S&P/ASX 200 index .AXJO fell 0.96% to 8,926.20 points, slipping below the key 9,000 mark for the first time since October 15.

On Wednesday, data showed that core inflation surged in the September quarter by the fastest in over two years, dampening expectations of a rate cut next week and forcing markets to pare back bets on the Reserve Bank of Australia's (RBA) broader easing cycle.

All of Australia’s 'Big Four' banks, along with Citi, Goldman Sachs, and Standard Chartered, expect the RBA to keep its key interest rate steady at 3.60% this year.

Economists at top lender CBA CBA.AX abandoned their call for one more rate cut next February and now expect the cash rate to remain on hold for a prolonged period.

Among the major sectors, financials .AXFJ fell 1.9% after two days of gains, with all of the 'Big Four' banks closing in the red. Top lender National Australia Bank NAB.AX lost 2.6%.

"Defensive assets have their valuations tied to the cash rate as an alternative to bonds, so we are seeing those stocks get sold off as expectations of a rate cut next week are now off the table," said Luke Winchester, portfolio manager at Merewether Capital.

Real estate stocks .AXRE finished 1.7% lower, with sector heavyweight Goodman Group GMG.AX shedding 1.4%.

Healthcare .AXHJ extended losses to a second day, weighed by a 4% drop in CSL CSL.AX.

New Zealand's benchmark S&P/NZX 50 index .NZ50 edged marginally higher to close at 13,409.21 points.