Australian shares closed lower in thin trading on Friday but posted a yearly gain, helped by a rally in December, as optimism about interest rate cuts early next year boosted market sentiment in recent weeks.

The S&P/ASX 200 index fell 0.3% on Friday to end the year at 7,590.80 points. The benchmark rose 7.1% in December, its best monthly gain since November 2020, and logged a yearly gain of 7.8%.

Australian shares have been rallying as prospects of rate cuts by key central banks have boosted investors' risk appetite.

"There is little new news to change the narrative of easing financial conditions and expectations that equities can push higher... The softness today does little to shift this view," said Kerry Craig, global market strategist at J.P. Morgan.

Monetary policy regulation by global central banks has been the key theme influencing investor sentiment during the year.

Central banks were firmly in the driving seat in 2023 as markets first repriced a higher-for-longer rate environment and then one in which expectations of policy easing accelerated, added Kerry.

In Sydney, heavyweight miners snapped a three-day rally on Friday, declining 0.7% as iron ore futures slid on Thursday after estimates showed a continued contraction in manufacturing activity in China.

The sub-index, however, posted its biggest monthly gain in 11 months, climbing 8.7%.

Gold stocks lost 2% on Friday after bullion prices remained range-bound, but posted a yearly gain of 24.5%, the index's biggest in four years.

Rate-sensitive financials dropped 0.2% on Friday with top lender Commonwealth Bank of Australia losing 0.4% after touching an all-time high on Thursday.

However, the sub-index posted its best monthly gain since October 2022, while adding 5.7% for the year.

Energy stocks fell 0.9% on Friday after oil prices were set for their first annual fall in two years, with the sub-index logging a yearly loss of 3.8%.

New Zealand's benchmark S&P/NZX 50 index ended flat at 11,770.49 points. The benchmark added 2.6% for the year. (Reporting by Aaditya Govind Rao in Bengaluru; Editing by Janane Venkatraman)