By Bernard Hickey
The Reserve Bank has included a scenario in its June Quarter Monetary Policy Statement for a rise in net migration to 45,200 by mid 2015, which it said could add four percentage points to house price inflation and add 54 basis points to its projections for short term interest rates.
The surge in net migration from virtually nothing in early 2013 to over 30,000 in the June quarter featured heavily in the Reserve Bank's forecasts and in the news conference after the release of the MPS, in which the Reserve Bank increased the Official Cash Rate by 25 basis points and stuck to its hawkish forecasts for interest rates.
The Reserve Bank said the rise had helped grow the Labour force and suppress wage inflation. The bank is forecasting an increase in the working age population over the current migration cycle of 100,000 or 3% due to migration. This compares with a cyclical increase in migration from 2002 to 2004 of 70,000.
Reserve Bank Governor Graeme Wheeler was asked in the news conference (from 14 minutes in the video above) if he would like to see the Government change migration policy to take pressure off the economy and interest rates.
"Migration is in many things a very positive force for the economy, particularly if it involves increasing skilled labour. There are demand and supply side effects," Wheeler said.
"The historic experience is the demand-side impact tends to come through first in the economy and that will be reflected in higher housing demand. What we're seeing this time is that maybe the impact on aggregate housing demand may not be as strong as, for example, the 2002 to 2004 cycle because a lot of the net migration is due to New Zealanders staying rather than departing the country and also a lot of the arrivals are tied in to temporary work permits," he said.
"So it's possible we won't see the same dramatic impact on house prices we saw in 2002 to 2004."
Wheeler was then asked about the Labour proposal to control migration to take pressure off interest rates.
"It's very hard to fine-tune immigration to meet demand purposes. By the time you make an adjustment you may well find the situation has completely changed," he said.
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