Rate cut drives index to five-month high

THE sharemarket closed at its highest point in five months, as investors cheered the Reserve Bank's decision yesterday to cut the official cash rate.

THE sharemarket closed at its highest point in five months, as investors cheered the Reserve Bank's decision yesterday to cut the official cash rate.

The benchmark S&P/ASX 200 Index rose 44.4 points, or 1 per cent, to 4433.0, its highest close since May 2. The RBA cut interest rates by 25 basis points, taking the official cash rate to a three-year low of 3.25 per cent.

"It was going to be cut eventually this year it was just a matter of was it going to be this month or the next," said Commsec market analyst Steven Daghlian.

The performance of the global economy of the coming months will underpin any further action by the RBA, but Mr Daghlian said the central bank had left scope for further cuts.

"Over the next three months there was going to be at least one cut. Over the next 12 months, the market is expecting about three cuts of 25 basis points.

"A lot is going to depend on what we see offshore over the next couple of months if things worsen in Europe, if the US isn't improving, if economic data out of China is still remaining subdued and disappointing," Mr Daghlian said.

"Then at least the Reserve Bank has scope to move on rates. A lot of the other major economies around the world don't have that luxury, with rates close to zero in a lot of those economies."

Consumer discretionary shares led the gains buoyed by prospects of extra money in consumers' pockets jumping 1.4 per cent, as did goldminers. Materials and energy also had strong showings, both up 1.3 per cent, telecommunications rose 1 per cent and financials pushed up 0.9 per cent.

Retail stocks performed well, posting most of their gains after the RBA decision. JB Hi-Fi finished up 3.3 per cent to $9.38 and Harvey Norman added 1 per cent to $1.94. Department store Myer jumped 3.5 per cent to $1.78 and rival David Jones rose 0.8 per cent to $2.52.

Mr Daghlian said the jump in retail stocks was directly linked to the RBA's rate cut.

If banks passed on the rate cut to mortgage holders, people would have more money to go out and spend, he said.

Miner Rio Tinto jumped 1.2 per cent, to $53.98, while rival BHP gained 1.3 per cent to $33.54. After emerging from a trading halt earlier in the day, Fortescue surged 1.4 per cent, to $3.55.

Goldminer Newcrest added 0.93 per cent, to finish at $29.31.

Among the banks, NAB led the charge, rising 1 per cent, to $25.81, Westpac added 0.9 per cent, to $25.16, ANZ gained 0.8 per cent, to $24.99 and CBA finished up 0.3 per cent at $56.07.

In late trading, the dollar fell 0.6 per cent to US102.93?, its lowest since September 7.