RBA holds at 4.35% and names AI investment as a reason rates cannot fall

The Reserve Bank of Australia held its cash rate at 4.35% this week. In a Sydney fireside chat on Wednesday, assistant governor Chris Kent named a specific reason it cannot cut yet: the country's AI and data-centre build-out is lifting demand faster than productivity is responding.

The RBA, Australia's central bank, is not making a judgment on AI. It is making a judgment on timing. Kent said "substantial investment in data centres and AI-related infrastructure has helped to support growth in aggregate demand of late," and added that "by itself, this AI activity means that policy rates need to be higher than otherwise, at least in the short run."

The remarks, two days after the board's August decision, put the AI capex cycle inside the RBA's reaction function in a way the bank had not done publicly before. They also sharpen a question Governor Michele Bullock raised on Tuesday, when she listed the AI boom alongside excess capacity, a tight labour market and the Middle East conflict as front-of-mind inflation risks, as regional outlets covering the RBA's August communications reported.

The mechanism rests on a temporal mismatch. Australia's measured productivity fell 0.5% in the 2025/26 financial year. The RBA's own assumption, set out in the August Statement on Monetary Policy, is that productivity recovers to 0.7% by 2028. Kent conceded that assumption could be overoptimistic, leaving the bank waiting for a supply-side offset the data is not yet delivering.

In the meantime, the demand side is already here. IT equipment investment rose 196% quarter-on-quarter in the March quarter, driven almost entirely by data-centre construction. Westpac, one of Australia's big four banks, estimates the project pipeline could reach A$150–155 billion (roughly US$97–100 billion at recent exchange rates) by the end of the decade. Most of the spend is on imported server racks, which means the headline investment number is larger than the lift to Australian GDP.

That import-heavy mix is the legitimate line of criticism: a large capex print can move the national accounts without doing much for domestic output, employment, or the productivity number the RBA forecasts. The bank is, in effect, counting a demand stimulus from imported machinery whose supply-side dividend is still theoretical.

The RBA's own firm-level survey, published in the November 2025 Bulletin as "Technology Investment and AI: What Are Firms Telling Us?", had already flagged that AI adoption was running ahead of measured productivity gains. Kent's speech, building on that survey, is the policy version of the same finding: the demand impulse is in the data, the productivity offset is not.

Kent also flagged the Strait of Hormuz as an upside risk, sitting alongside the AI mechanism. A disruption to oil and shipping flows would compound the demand-side pressure the bank is already trying to offset. The RBA forecasts inflation back to its 2.5% target by early 2028, a horizon that now depends on whether the productivity recovery arrives on the bank's own timetable.

The hawkish read, carried by an InvestingLive recap, is that the tightening bias is intact and further hikes have not been ruled out. The constructive read is the one the bank is offering: this is not the RBA doubting AI. It is the RBA asking whether the productivity dividend will arrive on the schedule its forecasts assume.

The test sits in the next productivity print and in the September RBA Bulletin. If the 0.7% assumption moves, the rate path moves with it.