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By Adwitiya Srivastava

Jan 20 (Reuters) - Australian shares settled higher on Monday as investors looked forward to a potential interest rate cut from the central bank next month, while diversified miner South32 S32.AX rose after its second-quarter production beat market estimates.

The S&P/ASX 200 index .AXJO climbed 0.5% to 8,347.40 to post its highest close since Jan. 8, with all sectors except gold finishing higher.

Market participants are awaiting fourth-quarter inflation data, due next week, to gain a better understanding of the Reserve Bank of Australia's monetary policy stance.

Earlier in January, data showed a drop in November core inflation, strengthening the case for a rate cut in February.

"Investors look to be feeling better about the interest rate picture due to softer CPI prints locally and in the US over the past few weeks," said Tim Waterer, chief market analyst at KCM Trade.

"This improved optimism over anticipated rate cuts has helped enthusiasm on the ASX to kick off the week."

Markets are still pricing in a 73% chance of a reduction of 25 basis points next month, according to the RBA watch tool.

Rate-sensitive financials .AXFJ rose 0.7%, with the 'big four' banks up between 0.4% and 0.7%.

Miners .AXMM climbed 0.2%, with South32 S32.AX rising 0.9% to its highest close since Dec. 11.

South32 reported a smaller-than-expected decline in second-quarter manganese ore output, as the miner resumed production in Australia following a cyclone that halted operations in March.

Discretionary stocks .AXDJ rose 0.6% in their fourth consecutive session of gains. JB Hi-Fi JBH.AX jumped about 3% to log its best session since Dec. 23.

Gold stocks .AXGD slumped about 1.6% to snap a nine-session rally, as bullion prices dipped. GOL/

New Zealand's benchmark S&P/NZX 50 index .NZ50 fell 0.3% to 13,088.31, with investors awaiting fourth-quarter inflation data due later this week for further direction.

(Reporting by Adwitiya Srivastava in Bengaluru; Editing by Subhranshu Sahu)

((Adwitiya.Srivastava@thomsonreuters.com))

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