RBA Fights Inflation Amidst AI Boom and Productivity Slowdown

The Reserve Bank of Australia (RBA) is facing a challenging environment as it tries to control inflation, thanks in part to the AI boom and sluggish productivity growth. According to RBA assistant governor Chris Kent, the surge in AI investment and data centre construction is making it harder for the central bank to slow down the economy with interest rates.

The AI-related investment has driven a 196% increase in IT equipment investment in the March quarter, with Westpac estimating that the data centre investment pipeline could reach $150 billion to $155 billion by the end of the decade. However, much of this spend will not directly boost the local economy due to high reliance on imported server racks.

While AI is expected to boost productivity and growth in the long term, Dr Kent concedes that the RBA's assumption that productivity growth will recover to 0.7% by 2028 could be overoptimistic, given its current rate of -0.5% in the 2025/26 financial year.

RBA governor Michele Bullock also highlighted other risks to the inflation forecast, including excess capacity, a tight labour market, and the Middle East conflict, as well as the impact of falling house prices on consumption growth.