(Adds analysis, quotes, stocks on the move)
By Cecile Lefort and Ian Chua
SYDNEY/WELLINGTON, Oct 28 (Reuters) - Australian shares recouped early losses on Wednesday after surprisingly subdued inflation reinforced speculation of more monetary easing and lower bond yields, making stocks a more palatable asset.
The ASX 200 jumped up almost 20 points after data showed consumer prices rose 0.5 percent in the third quarter, slowing from the second quarter when they rose 0.7 percent.
"The fact that inflation is lower than expected and below target adds to the case for the Reserve Bank of Australia (RBA) to cut the cash rate again in order to offset the potential negative impact on the economy of big bank mortgage rate hikes," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.
"I continue to expect the RBA to cut the cash rate by 0.25 percent when it meets next week or if not then, then sometime in the next few months."
After falling as much as 0.5 percent in early trade, the S&P/ASX 200 index .AXJO recovered to be flat on the day at 5,351.1 points by 0146 GMT. The benchmark touched a 2-1/2-month peak on Monday.
Also underpinning gains was firm demand for healthcare stocks,, with Ramsay Health Care RHC.AX , Sonic SHL.AX and CSL CSL.AX up between 1.5 and 2 percent.
But weaker-than-expected earnings by National Australia Bank NAB.AX weighed on the index.
Shares of the country's largest lender by assets skidded 1.5 percent in the largest daily drop in one month. Rival lenders Australia and New Zealand Banking Group, Commonwealth Bank of Australia were dragged lower, while Westpac Banking Corp managed to rise 0.6 percent.
Lower oil and iron ore prices kept energy and natural resources sectors under pressure.
Liquefied Natural Gas LNG.AX skidded 5.4 percent, while oil and gas producer Santos STO.AX dropped 2.5 percent.
Miners BHP Billiton (L:BLT) BHP.AX and Rio Tinto (L:RIO) RIO.AX fell 2.4 percent and 1.2 percent respectively.
Also capping the index was a profit warning from Dick Smith DSH.AX . The electronics retailer slashed its full-year profit forecast to a maximum of A$8 million, from a previous guidance of up to A$48 million. Its shares dived 30 percent to hit a record low.
New Zealand stocks were also unchanged, taking a well earned breather after a 12-session rally swept the index to all-time highs above 6,000.
The benchmark S&P/NZX 50 showed little action at 6,009.44, just off a peak of 6,014.48 set on Tuesday.
Capping the market, Air New Zealand fell 1.4 percent, but was still up nearly 20 percent so far this month. Kiwi Property Group dipped 0.7 percent, though it too was still up 5.4 percent on the month.
SKY Network Television which is down 1.1 percent so far this month, edged up 0.7 percent. (Editing by Kim Coghill)