Reserve Bank of Australia Warns AI Boom Fuels Inflation

The Reserve Bank of Australia is monitoring significant upside risks to inflation, driven by a surge in artificial intelligence investment and geopolitical instability. Assistant Governor Christopher Kent stated that substantial spending on data centers and AI infrastructure is supporting aggregate demand, which necessitates higher policy rates in the short term to restrain the economy. This AI-driven activity contributed to a 196 percent increase in IT equipment investment during the March quarter.

While the central bank recently held the cash rate at 4.35%, Governor Michele Bullock indicated that rates might need to rise again. Bullock identified the AI boom, a tight labor market, and the Middle East conflict as primary risks to the inflation outlook. Kent specifically noted that the Strait of Hormuz must remain open to avoid additional monetary tightening.

These pressures are compounded by sluggish productivity growth, which fell 0.5 percent in the 2025/26 financial year. Such a decline complicates the bank's goal of reaching a 2.5 percent inflation target by early 2028. Conversely, the bank noted that falling house prices are providing some restrictive financial conditions that assist in slowing demand and housing credit growth.