Migration cuts, AI and rising interest rates means an era of long-term disinflation - ABC News & Headlines – Australian Broadcasting Corporation

Donald Trump's war with Iran and his tariffs are producing short-term inflationary supply shocks. (Reuters: Nathan Howard)

The Reserve Bank will increase interest rates on Tuesday for the fourth time this year, and what's more, it will be a "hawkish hike" — that is, with suggestions of more to come.

The first will tend to increase inflation and therefore push interest rates higher — though it's likely to be short-term — while the second and third are longer-term and will tend to lower inflation and interest rates by reducing growth.

If the Houthis and Saudis engage in a full-scale war, the oil price will head towards $US150 a barrel. (Houthi military media via Reuters)

Two weeks ago, the Iran-backed Houthis launched a wave of drone and ballistic missile attacks on Saudi Arabian oil terminals and pipelines in the country's south. Two days later, they defeated Saudi forces on the Red Sea coast and captured the port of Mokha.

As of last week, the Houthis now control the entrance to the Red Sea, the Bab el-Mandeb Strait, and have severely damaged the east-west pipeline with which Saudi Arabia had been bypassing the Strait of Hormuz to get oil to the global market.

Now the only alternative to Hormuz is a limited pipeline through the United Arab Emirates to the Port of Fujairah on the Gulf of Oman.

If the Houthis and Saudis engage in a full-scale war, as seems increasingly likely, the oil price will head towards $US150 a barrel. In any case, effective Iranian control of both the Strait of Hormuz and the Bab el Mandeb Strait fundamentally alters the world's energy supply equation, for the worse.

Meanwhile, on Tuesday last week, US President Donald Trump addressed the United Nations General Assembly and wondered aloud: "Do I annihilate the Islamic Republic and do it quickly, never giving them a chance to kill and destroy people and countries again? Do I drive them into hell with no chance of survival and no hope of future greatness or generations?"

That got the usual rolled eyes over another comically outlandish Trump statement, but there is a serious side to this.

Trump and his advisers would now realise that the current stalemate that had been keeping the oil price under $US100 a barrel is no longer tenable, given a second front in the war has opened that directly engages Saudi Arabia.

The US must find a way to end it quickly, to prevent an economic and political disaster, and as usual, Trump's opening gambit is bluster, albeit an extreme version.

But annihilation of Iran is not possible — even Trump won't do a Harry Truman and drop an atomic bomb on Tehran — and anything short of that is unlikely to work, so the only viable next step is diplomacy and negotiation.

That means giving Iran, and the Houthis, what they want and probably just bringing back the Iran nuclear deal, the Joint Comprehensive Plan of Action (JCPOA), that was signed in 2015 and torn up by Trump in 2018.

It would be humiliating for Trump but better than the alternatives, and the response of Americans would be relief, in time for the midterms.

Dario Amodei says: "If managed poorly, I even believe AI could be a risk to humanity as a whole." (Reuters: Denis Balibouse)

As for AI, everything changed last week with the revelation that an OpenAI agent hacked a Medicare data portal in July, on top of the infamous Hugging Face attack also in July, in which a swarm of 700 OpenAI agents hacked that company.

On Wednesday, as reported by AP, the heads of major artificial intelligence firms "pleaded with the United Nations … to save the world or at least its people — by somehow regulating the fast-expanding technology that they have been designing".

Dario Amodei, CEO of Claude developer Anthropic, said: "If managed poorly, I even believe AI could be a risk to humanity as a whole".

Sam Altman, CEO of OpenAI, said: "We could lose control of the future to AI."

And on Thursday, Chinese President Xi Jinping said AI must "always be under human control".

Yes, but the whole point of AI and its benefits is its autonomy.

As historian and author Yuval Noah Harari said in a recent podcast: "This is the first time that we are creating agents, and not tools."

"In the Industrial Revolution, you created steam engines, trains, ships, looms … but these were all tools in our hands. We still make the decisions, and we still decide how to use them," he said.

"AI is not a tool. It is an agent. An agent is something that can make decisions by itself and invent new ideas by itself. It doesn't wait for us. And right now, the point that all the AI corporations are focused on is the moment of what they call recursive self-improvement, the moment when the AIs themselves can build the next generation of AIs, that build the next generation of AIs."

Patrick Collins, CEO of cybersecurity firm Dam Secure, told me last week that the Medicare and Hugging Face hacks made it clear that only autonomous defence would eventually be able to deal with autonomous hacks.

That is, we are heading for a world in which autonomous AI agents slug it out in the ether on our behalf, unmonitored and uncontrolled. Can that future be avoided with guardrails? Probably not. As Elon Musk told an interviewer recently, we're already on the rocket ship. It's too late.

Back to interest rates. The main reason interest rates will go up on Tuesday is that Australia is exceeding its GDP "speed limit" — what the RBA calls potential output. The rising oil price is only part of it.

This speed limit has fallen from more than 3 per cent to about 1.8 per cent because of lower productivity, the effect of which has been masked by very high levels of immigration, on which more below.

Rates are set to rise as RBA governor Michele Bullock says the "heat" needs to be taken out of the jobs market. (ABC News: John Gunn)

In last week's Intergenerational Report (IGR), Treasury forecast long-term productivity growth of 1.2 per cent, up from minus 0.2 per cent in the latest 12 months.

The source of that dramatic rebound in productivity, almost double what the RBA itself is forecasting for the next few years, is not revealed by Treasury, except that it has a lot to do with AI.

To what extent are the productivity benefits of AI due to its autonomy? No-one has worked that out yet, but it's clear that the further into the future you look, the more autonomy is a factor.

The IGR looks 40 years into the future, but those building AI are saying it could take over, and possibly kill us all, within 10 years.

You could conclude that AI makes the IGR pretty much irrelevant, which Treasury tacitly acknowledges by making the first chapter in the 2026 report about AI, but you could also conclude that the current debate about AI autonomy is crucial for any predictions of productivity growth.

If AI autonomy is curtailed, assuming it even can be, then the government's forecasts of improved productivity growth and therefore an increased speed limit for the economy will be wrong. They'll probably be wrong anyway, but they will be even more wrong if the world manages to rein in AI.

Into this swirling uncertainty comes the plan to cut Net Overseas Migration (NOM) by another 25 per cent in two years to 225,000 (although this is a target, not a cap).

Canada slashed migration in 2024–25, halving population growth, which cut GDP growth by about 0.3 percentage points in 2025 and 0.5 points in 2026 and led to mass sackings in the tertiary education sector because, as in Australia, a lot of the cut was focused on foreign students.

But the big difference between Canada in 2024–25 and Australia in 2026–27 is interest rates.

The Bank of Canada cut rates nine times between June 2024 and October 2025 by a total of 2.75 per cent and hasn't yet increased them; the Reserve Bank of Australia cut three times in 2025, by a total of 0.75 per cent, took all of those cuts away in the first half of 2026 and will now go further, probably with two more hikes.

So, while rate cuts in Canada provided a buffer against the economic impact of migration, in Australia interest rate hikes will exacerbate it.

The bottom line is that with shrinking migration, autonomous AI and rising interest rates, we are in an era of long-term fundamental disinflation — except for Trump.

His war with Iran and his tariffs are producing short-term inflationary supply shocks that are disturbing the trend.

Alan Kohler is a finance presenter and columnist on ABC News. He hosts the podcast That's Business with Alan Kohler in the ABC Business Daily feed on Friday. He also writes for Intelligent Investor.