31 Oct 2023

Migration and house price rises to keep fuelling inflation - Westpac

7:30 am on 31 October 2023
Westpac Bank logo

Photo: 123rf

Westpac says inflation is likely to remain above the Reserve Bank's 1 to 3 percent target range for all of 2024, with potential for another increase in the official cash rate (OCR) in the first half of next year.

"While we are seeing lower imported goods and food inflation, domestic price pressures are still running red-hot," the bank's chief economist Kelly Eckhold said. "We continue to forecast a protracted period of sub-trend economic growth."

He said household budgets would continue to be squeezed as rising interest rates increasingly bite.

"A significant portion of past interest rate increases are still to pass through to borrowers."

Eckhold said the new government was likely to tighten the fiscal purse strings to try to bring the budget back to balance, which would help reduce inflation pressures.

"Nonetheless, budget deficits will likely persist in coming years and the government will have to make some tough choices given that population growth will increase demand for core public services and infrastructure."

Eckhold said strong migration would support economic growth.

"Population growth is running at multi-decade highs and is adding to demand as well as the productive capacity of the economy," he said, adding the growth would affect the housing market.

"Higher long-term interest rates will restrain future house prices to some extent, but the impact of the surge in population will be significant. On balance, we expect house prices will rise by 8 percent over 2024."

He said China was expected to continue to be a challenge for exporters, along with weak commodity prices.

"As a result, Westpac has revised down the speed at which commodity prices will rebound in coming years."

He said the bank expected a further increase in the Reserve Bank's OCR in the first half of next year, and only gradual rate reductions from early 2025.

"Our sense is that further monetary policy action will still be required to ensure that inflation will fall in a timely manner."

However, Eckhold said there were considerable risks in the market which created some uncertainty.

"There are a number of pressures in both directions, which might mean that either interest rates have to go up even a bit further than we currently forecast or indeed, that they could even come down maybe a little bit earlier than we're forecasting.

"So we think it's going to be quite important for ourselves and the Reserve Bank to be watching the data pretty carefully to see how things pan out."

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