RBA Stays Vigilant on AI Boom's Economic Impact

The Reserve Bank of Australia (RBA) is keeping a close eye on the growth of artificial intelligence investment, which is posing a challenge to its inflation-fighting efforts. The central bank's assistant governor, Chris Kent, said that the AI boom is undermining the effectiveness of interest rates in slowing down the economy.

The surge in AI-related investment has been driven by the data centre build-out, with IT equipment investment increasing by 196% in the March quarter. Westpac estimates that the data centre investment pipeline could reach $150 billion to $155 billion by the end of the decade.

However, much of this spend would not directly boost the local economy due to the high reliance on imported server racks. The RBA's governor, Michele Bullock, noted that housing is not the main concern for the economy, but rather excess capacity, a tight labour market, the Middle East conflict, and the AI boom.

Kent also expressed concerns about the potential for productivity growth to be lower than assumed, which could make it harder to bring inflation down. Bullock added that the Strait of Hormuz not opening up in a reasonable timeframe is another risk to the RBA's forecast for inflation to return to its 2.5% target by early 2028.