Speaking two days after the RBA kept the cash rate steady at 4.35 per cent, assistant governor Chris Kent said financial conditions were somewhat helping to restrain aggregate demand, which was needed to push down inflation.
But the effectiveness of the benchmark lending rate to slow the economy at any given level was being undermined by the boom in AI investment, he said.Â
"Substantial investment in data centres and AI-related infrastructure has helped to support growth in aggregate demand of late," Dr Kent told a Reuters event in Sydney on Thursday.
"By itself, this AI activity means that policy rates need to be higher than otherwise, at least in the short run."
In Australia, AI-related investment has been dominated by the data centre build-out, which drove a 196 per cent increase in IT equipment investment in the March quarter.
Westpac has estimated the data centre investment pipeline could reach $150 billion to $155 billion by the end of the decade.
However, given the high reliance on imported server racks, much of the spend would not directly boost the local economy.
In the long term, it is hoped AI will boost productivity and allow Australia's economy to grow faster without driving up inflation.
Dr Kent concedes the RBA's modest assumption that productivity growth, which fell 0.5 per cent in the 2025/26 financial year, will recover to 0.7 per cent by 2028 could be overoptimistic.
"So if that doesn't come to pass, other things equal, that makes the job of bringing inflation down that much harder," he said.
Another risk to the RBA's forecast for inflation to come back to its 2.5 per cent target by early 2028 was that the Strait of Hormuz does not open up in a reasonable timeframe, he said.
On the other hand, falling house prices were making financial conditions more restrictive and helping the central bank get inflation back under control.
However, governor Michele Bullock says housing is not the main game in terms of the impact on the economy
"The main game here for us is excess capacity, a tight labour market, particularly in some areas like construction, the Middle East conflict, the AI boom," she told reporters on Tuesday.
"These are all the things that are front of mind in terms of the risks, the inflation outlook."
NAB economists on Thursday updated their forecasts for the housing downturn, which they say has been driven by the RBA's three rate hikes since February, high unaffordability, economic uncertainty and changes to investor tax breaks.
NAB now thinks national prices will fall about seven per cent from peak to trough.
Every 10 per cent fall in the housing market generally subtracted about 10 per cent from consumption growth over a couple of years, NAB senior economist Taylor Nugent said in a research note.
"The housing story supports forecasts for slow growth and an assessment that financial conditions are now somewhat restrictive," he said.
