The Australian stock market rallied this afternoon after the Reserve Bank of Australia slashed interest rates to their lowest point in history.

The RBA cut the offical cash rate to 1 per cent, the lowest in history, after leaving it untouched at 1.5 per cent for nearly three years.

There has not been an increase since late 2010.

The RBA decides each month on the offical cash rate, which is the interest rate charged on overnight loans to commercial banks.

When rates go down markets go…up

Stock markets tend to get a boost when interest rates are slashed, as investors look elsewhere for a place to grow their capital.

“When interest rates fall, companies’ cost of doing business falls, servicing their debt becomes cheaper,” explains Australian Stock Report.

“This reduction in business costs results in an increase in profits (all else being equal), which leads to an increase in demand for shares, thereby pushing them higher.”

That was reflected on the ASX this afternoon. The ASX small ordinaries index benefited most, jumping 0.89 per cent, while both the all ordinaries and ASX200 indices had gains of over 0.3 per cent.

The stock market reacts to rate cuts. Pic: Yahoo Finance

Phillip Lowe, RBA governor, said the rate cut would “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target”.

“The outlook for the global economy remains reasonable. However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside,” he said.

“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”