By Roshan Thomas

June 26 (Reuters) -Australian shares closed lower on Wednesday, dragged by declines in financial and mining stocks, as concerns about rate hikes heightened the risk of loan defaults and higher cost of capital.

The S&P/ASX 200 benchmark index .AXJO dropped by 0.7% to 7783 points. The benchmark ended 1.4% higher on Tuesday.

Data from the Australian Bureau of Statistics showed that the consumer price index rose at an annual pace of 4%, above market forecasts of 3.8%, lifting the probability of aninterest rate hike this year.

The Reserve Bank of Australiahas held interest rates steady at a 12-year high of 4.35% for five straight meetings.

A rate hike could pose a significant downside risk for Australian shares as funding costs willrise, potentially leading to dramatic capital outflows, Glenn Yin, head of research and analysis at AETOS Capital Group said.

The RBA'snext monetary policy decisionmeeting would be held on Aug. 5.

"The RBA will take stock of today's figures with some concern, particularly as their rhetoric has noted the need to ‘remain vigilant on upside risks to inflation'," Stephen Wu, an economist with the Commonwealth Bank of Australia said in a note.

Miners .AXMM led losses on the resource-heavy bourse, dropping 0.5%, as iron ore and copper prices fell globally.

Mining behemoths Rio Tinto RIO.AX and Fortescue FMG.AX each lost 0.4% and 0.2%, respectively.

Financial stocks .AXFJ shed 0.9%.

AETOS Capital's Yin said that while interest rate hikes generally benefit financial stocks, excessive rates can lead to increased defaults on loans, which can destabilize lenders' mortgage books and constricted capital inflows into equities.

Shares of the "Big Four" banks slipped between 0.6% and 1.3%.

Gold stocks .AXGD tracked weak bullion prices to end 3% lower, its lowest closing level since March 27. GOL/

Shares of gold miners Northern Star Resources NST.AX, St Barbara SBM.AX and Genesis Minerals GMD.AX were down between 2.5% and 4.4%.

The New Zealand benchmark S&P/NZX 50 index .NZ50 rose 1.0% to 11,835.02 points, its highest closing level since June 14.

Roshan Thomas in Bengaluru; Editing by Eileen Soreng

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