RBA Grapples with AI Boom and Productivity Slump

The Reserve Bank of Australia (RBA) is facing challenges in its efforts to control inflation due to the surge in artificial intelligence investment and sluggish productivity growth. According to RBA assistant governor Chris Kent, the AI boom is driving a significant increase in data centre construction, which is supporting growth in aggregate demand.

However, this increased investment is also contributing to higher interest rates as policy makers struggle to slow down the economy at any given level. Dr. Kent noted that 'substantial investment in data centres and AI-related infrastructure has helped to support growth in aggregate demand of late' but added that it means 'policy rates need to be higher than otherwise, at least in the short run.'

The RBA's forecast for productivity growth to recover to 0.7% by 2028 may also be overoptimistic, making it harder to bring inflation down. The bank is also monitoring the impact of falling house prices on financial conditions and its effects on inflation.