The 'Great Rotation' will stay the RBA’s hand

It seems central banks have achieved a tipping point in making cash less attractive, and sparking appetite for market risk. The Reserve Bank would be wise to hold until the state of play is more clear.

The most important reason the Reserve Bank won’t cut the cash rate again tomorrow is that a tipping point seems to have been reached in the 'defensive' versus 'growth' investment equation.

With the cash rate cut to 3 per cent in December – the same level as it was during the global emergency of 2009 – term deposit rates are down to 4 per cent, or not much more.

A switch seems to have gone off in investors’ heads around the world: time to buy shares. Local brokers are reporting that there were near panic buying conditions during January, with the market index rising nearly 10 per cent since the last interest rate cut on December 5, including a remarkable 10-day rising streak.

What’s more house prices are on the rise again as well, with RP Data and Rismark reporting on Friday that the national median rose 1.2 per cent in January. And why not? Investment property has produced a total return of up to 7 per cent over the past 12 months.

In the circumstances it would seem almost irresponsible of the Reserve Bank to cut rates again tomorrow, even though economically things are much the same as they were in December.

The exchange rate is where it was, employment is still weak and so are retail sales and new credit, and manufacturing is still contracting. Australia is still facing a gap between the end of the mining boom and the start of a manufacturing revival.

Against that global conditions are clearly improving, or at least not getting worse. America managed to not drive off the fiscal cliff and has also put off a debt ceiling default; Europe is continuing to muddle through and may just be beginning a revival; Japan has discovered monetary policy; China is growing at close to 8 per cent once again.

But the main thing to have changed since the December meeting is investor sentiment towards growth assets (shares and property).

To some extent central bankers always hope that by cutting interest rates they can drive up asset prices by making cash less attractive, not that they would ever admit this.

It does seem that they have finally achieved a global tipping point with this – what equity strategists are starting to call the Great Rotation (out of bonds and cash and into equities). It’s early days, and still the subject of heated debate, but after a 6 per cent rise in January and a big increase in broker inquiries and market turnover, it’s clear that something is going on.

The Reserve Bank would be wise to hold rates until at least it’s a bit clearer what, exactly, it is that’s going on.

Central banks pouring kerosene on nascent investment booms has gone out of fashion since Alan Greenspan left the scene.

Follow @AlanKohler on Twitter

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