Reserve Bank interest rates decision: Why immigration surge could trigger more hikes

A record wave of immigration could prolong Australia’s high inflation and lead to more rate hikes, leading economists say.

Net annual immigration is expected to reach a record 400,000 in 2022-2023, a level significantly above the Treasury’s forecast of 235,000 in last year’s October budget.

With 315,000 expected in 2023-2024, that equates to 715,000 new entrants over two fiscal years.

AMP chief economist Shane Oliver said strong population growth meant inflation could take longer to moderate, potentially leading to more increases from the Reserve Bank of Australia.

The RBA on Tuesday raised interest rates by 0.25 percentage points to a new 11-year high of 3.85 percent, up from 3.6 percent, surprising financial markets.

“The risk of more rate hikes remains high given still high inflation, upside risks to wages and RBA concerns that very strong population growth will add to inflation,” said Dr. Oliver.

Treasurer Jim Chalmers said the 718,000 migrants expected in 2022-23 and 2023-24 were not part of a government target when asked about the effect on inflation.

“First of all, it is important to remember that the substantial increase in net foreign migration is not a number chosen by the government,” he said on Tuesday.

“That’s not a number that the government nominates or a target that the government nominates.

“The reason we expect 718,000 over a two-year net overseas migration is because the students have come back quickly and the long-term tourists have come back quickly and fewer Australians are deciding to go abroad to work.”

Dr. Chalmers said the large increase would still not make up for the shortfall in 2020 and 2021, when Australia was closed to migration due to the pandemic.

“Even with the significant increase in net overseas migration, we still haven’t caught up with what we lost during Covid and that’s also important to remember,” he said.

The rapid uptick in immigration since the reopening of the Australian border in December 2021 means that 200,000 new homes will be needed to accommodate population growth, based on an average of at least two people for each home.

In metropolitan markets, the rental vacancy rate is a very tight 1.1 percent, data from SQM Research showed.

Michele Bullock, deputy governor of the Reserve Bank, told a forum in Melbourne last month that high immigration is likely to lead to high inflation.

“We have strong immigration. So yes, there are problems with rental housing and that has implications for inflation, because rental inflation is going to go up,” she said.

Inflation fell to 7 percent in March, lower than the highest annual rate in 32 years of 7.8 percent in December.

But the consumer price index was still well above the Reserve Bank’s target of two to three percent.

RBA Governor Philip Lowe said on Tuesday that this meant interest rates could continue to rise.

“Inflation in Australia is past its peak but is still too high at 7% and will take some time to get back into target range,” he said.

Given the importance of bringing inflation back to target within a reasonable time frame, the board ruled that a further rate hike today was warranted.

“Some further monetary policy tightening may be needed to ensure that inflation returns to target within a reasonable time frame, but that will depend on how the economy and inflation evolve.”

Housing costs rose 9.8 percent in the year to March, inflation figures from the Australian Bureau of Statistics showed.

Separate data from SQM Research showed that average unit rent in Sydney rose 30.1 percent to $654.45 per week.

Dr. Oliver said interest rate cuts at the end of 2023 are likely to keep property prices flat in 2022 and rise five percent in 2024.