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Population ‘shock’ threatens inflation outlook: HSBC

By Charbel Kadib
1 minute read

The recent surge in population growth has been flagged as an understated upside risk to the inflation outlook and the trajectory of monetary policy.

Since the unwinding of COVID-era restrictions on immigration, Australia’s population has expanded well beyond the historical average.

According to the latest figures from the Australian Bureau of Statistics (ABS), Australia’s population grew 2.2 per cent in the 12 months to 31 March 2023, rising to 26.5 million.

Net overseas migration accounted for approximately 81 per cent of the growth, with the total population bolstered by 454,400 – driven by approximately 681,000 new arrivals.


The increase in net overseas migration has far exceeded government projections, which had Australia’s population increasing by roughly 235,000 as at the end of 2022.

But according to HSBC chief economist Paul Bloxham, rapid population growth is partly to blame for inflation “stickiness”.

He said the inflationary impact has been understated in the broader economic discourse.

“For the economy, the surge in inward migration boosts both demand (for goods, services, and housing), and supply (primarily of labour),” he noted in an analysis published on Monday (30 October).

Mr Bloxham points to atypical developments in the national residential property prices, which have regained approximately 8 per cent of their value after falling just 10 per cent in response to aggressive monetary policy tightening from the Reserve Bank of Australia (RBA).

“Standard forecasting models suggest that a 400 bp rise in interest rates might typically see housing prices fall by 15–20 per cent,” he said.

“The surge in population growth helps to explain the turnaround. These models also include measures on rental yields that respond to the balance of supply and demand in the housing market.

“The surge in inward migration has been a surprise, which has driven a sharp fall in rental vacancy rates and a rapid rise in rents, which have in turn also supported housing prices, despite the rise in interest rates.”

This dynamic has been flagged by RBA governor Michele Bullock, who has also said she is “surprised” by the current strength of the property market.

“[Housing prices] bottomed sooner than we thought and now they’re back to where they were in their peaks of the pandemic,” she said.

Household consumption, Mr Bloxham added, also remains “positive” despite weakening, as new arrivals boost demand for goods and services.

“With many more people in the economy, there are also many more consumers,” he said.

Moreover, labour markets have remained somewhat resilient as new arrivals bolster supply.

“New migrants are filling roles, and helping to meet some of the acute skills shortages that were apparent in 2022,” Mr Bloxham observed.

As such, Mr Bloxham has assessed that a “positive shock” to migration is net inflationary in the short-term and may increase the risks of further monetary policy tightening, particularly amid recent evidence of a reacceleration in price pressures.

“Amongst the many factors at work, the significant upside surprise to population growth is playing a role. Given the magnitude of the upside surprise to population growth, it should perhaps be unsurprising that inflation is still stronger than was expected,” he said.

HSBC is expecting the Reserve Bank to lift the cash rate by an additional 25 bps at its next monetary policy board meeting on Melbourne Cup Day (7 November).

“Inflation is down from its peak rate and the jobs market is slowly loosening, getting inflation back to the RBA’s target band by the second half of 2025 (as the central bank is aiming for) will likely require some further tightening of financial conditions,” he warned.

All four of Australia’s major banks join HSBC in forecasting a November hike, while Deutsche Bank economist Phil O’Donaghoe has projected back-to-back increase in both November and December.

Population ‘shock’ threatens inflation outlook: HSBC

The recent surge in population growth has been flagged as an understated upside risk to the inflation outlook and the trajectory of monetary policy.

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