What does inflation have to do with interest rates?

There was rather big news out of the Reserve Bank recently that might not have got the mainstream media coverage it deserved in my opinion.  
Now, I’m in no way an economist, but with property markets so keenly tied to certain economic indicators, I wanted to share my thoughts on what the latest inflation figures mean for homebuyers and investors.  
There has been an increase in media stories of late that seemed to be forecasting some type of imminent increase in interest rates because of the strong property price growth in most parts of the country. 
This type of commentary is not overly helpful when the Reserve has been very open about its intention not to increase the cash rate for a number of years to help the nation’s economic recovery.  
Indeed, the Australian Prudential Regulation Authority or APRA has even come out to kybosh the suggestion that they will instigate lending restrictions anytime soon by explaining they monitor borrowing standards not property price pressures.  
On top of the two key interest rate and lending decision-makers saying they are not considering changing anything at all, the latest inflation data is another reason to accept that interest rates are set to stay low for some time yet. 

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 The latest Consumer Price Index data shows that inflation is softer than expected with the headline figure rising only 0.6 per cent in the March quarter to 1.1 per cent annually – significantly lower than economists had forecast. 

That core inflation measure is now at its lowest annual rate on record, which means that the Reserve’s determination to leave interest rates low for a prolonged period, until at least 2024, is more than justified.  

The thing is, inflation has been underwhelming for a long time already, which is why we had historically low interest rates for a number of years before the pandemic. 

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 As you can see from the cash rate target graph, the cash rate has been at three per cent or below since about 2015, which was actually the last time that inflation was anywhere near the Reserve’s target band of two to three per cent. 
Fundamentally, the Reserve’s job is to keep inflation within a target band that was set in the early 1990s, but which has been more difficult to attain since the Global Financial Crisis more than a decade ago.  
That’s why anyone who have invested in residential property since that time has enjoyed some of the lowest interest rates on record.  
Indeed, at what point do interest rates that start with a three or four become the new normal? 

However, when you couple record low inflation with sluggish wages growth, and the Federal Government’s intention to see the unemployment rate fall well below five per cent, there just doesn’t seem to be any evidence to support any increase in interest rates for the foreseeable future.  
And it is this combination of factors that creates a rare opportunity for potential property investors to invest in income and capital-growth producing assets using the most affordable credit in history.  

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