Sharemarket bounces on rate-cut hope

The sharemarket has posted its biggest day in 19 months, following a decision by the Reserve Bank to keep the door open for further cuts to the cash rate despite the dollar's recent sharp fall.

The S&P/ASX 200 Index was trading 1.5 per cent higher on the back of positive global manufacturing data, but rallied late 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 in value, falling below US92¢ after the RBA decision. It was trading at US91.91¢ late on 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," Mr Lilley said.

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

QBE's market capitalisation rose by $780 million as shares in the insurer soared by 4.18 per cent. Oil and gas explorer Santos put on $552 million after it closed 4.6 per cent higher.

All major sectors closed more than 1.5 per cent higher. The embattled gold mining sector soared 6.9 per cent, while materials rose 3.7 per cent. The gains followed Monday's heavy losses, when the the S&P/ASX200 Index recorded 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 sharemarket is expected to be driven by economic news in July before a corporate information blackout a month out from reporting season, CIMB head of research sales Justin Gallagher said.