SYDNEY/WELLINGTON, May 6 (Reuters) - Australian shares trimmed losses on Friday as the odds shortened for another cut in interest rates this year after the central bank slashed its inflation forecasts.
The S&P/ASX 200 index .AXJO was down a mere 0.4 percent, or 19.1 points, at 5,260.0 by 0322 GMT. It fell as much as 1.5 percent earlier in the session.
In its 66-page quarterly report, the Reserve Bank of Australia (RBA) said it now expected underlying inflation to be at just 1 to 2 percent for 2016, below its medium term target of 2 to 3 percent. reiterate our view the RBA is likely to cut the cash rate another 25 basis points to a record low of 1.5 percent, probably at its August meeting post Q2 CPI data, but there is now risk of further easing beyond this," UBS analysts wrote in a note to clients.
On Tuesday, the RBA cut its cash rate by 25 basis points to an all time low of 1.75 percent, citing surprisingly low inflation readings for the first quarter.
A low interest rate environment tends to drive investors to riskier assets such as stocks in search of higher returns.
The major banks were mixed with Westpac Banking Corp WBC.AX in the lead with a 0.3 percent gain. National Australia Bank NAB.AX was flat while Australia and New Zealand Banking Corp ANZ.AX and Commonwealth Bank CBA.AX were down.
Shares in Macquarie Bank MQG.AX eased 0.4 percent, after an early rally of more than 2 percent fizzled.
The investment bank lifted its annual net profit and dividends to a record but said it expected earnings in the current financial year to be broadly in line with 2016. across the Tasman Sea were subdued with New Zealand's benchmark S&P/NZX 50 index .NZ50 a touch firmer at 6,888.4.
Holding the market back was a 16 percent slump in shares of SKY Network Television SKT.NZ , which reported a loss of subscribers that will hurt earnings.