Reserve's rate stance spurs rally

The Australian sharemarket has posted its biggest one-day gain in 19 months, after the Reserve Bank kept the door open for further cuts to the cash rate despite the dollar's recent sharp fall.

The Australian sharemarket has posted its biggest one-day gain in 19 months, after the Reserve Bank kept the door open for further cuts to the cash rate despite the dollar's recent sharp fall.

The S&P/ASX200 index was trading 1.5 per cent higher after positive global manufacturing data early on Tuesday, but rallied later after the RBA stayed its hand but retained an easing bias.

The benchmark index closed 2.6 per cent higher at 4834 points - its best day since December 2011. The broader All Ordinaries Index ended Tuesday 2.6 per cent up at 4810.3 points. It was its strongest day since October 2011.

The Australian dollar lost half a cent, falling below US92¢ following the RBA decision. It was trading at US91.91¢ late Tuesday.

The Reserve Bank's desire for a lower Australian dollar despite the currency losing more than 12 per cent of its value since mid-April was a surprise, and lifted the already positive mood in the market, UBS interest rate strategist Andrew Lilley said.

"[The RBA] was saying that effectively the inflation outlook was unchanged even after the currency fell, which might mean they don't think the currency has fallen enough to generate better demand in Australia," he said.

The rally boosted the market's value by about $35 billion. Mining giant BHP Billiton's market capitalisation rose almost $6 billion, closing 3.7 per cent higher at $32.07. Rio Tinto rose by 2.6 per cent to $53.07.

The gains followed heavy losses on Monday, which resulted in the S&P/ASX200 recording its worst start to a financial year since 2009-10.

RBA governor Glenn Stevens said in a statement that the Australian dollar remained at a "high level" despite its recent depreciation, and noted - as he did in the June board minutes - that further falls "would help to foster a rebalancing of growth in the economy".

Economists said they expected at least one more rate cut this year unless the currency slips further, amid a slower-than-expected transition towards non-mining-led growth as the resources investment boom peaks.

"We think the likelihood is that the RBA will ease again by the end of the year," NAB senior economist David de Garis said.

"Our expectation is that the unemployment rate will push up towards and maybe through 6 per cent by the end of this year. Another [trigger] could be if the inflation numbers surprise on the lower end, providing the RBA with more room to ease."

Financial markets were pricing in an almost 50 per cent chance of a 25 basis points rate cut at the RBA's August board meeting.

The Australian market is expected to be driven by economic news this month before a corporate information blackout a month out from reporting season, CIMB's head of research sales Justin Gallagher said.

Related Articles