RBA Assistant Governor (Economic) Sarah Hunter warned that the rapid expansion of artificial intelligence could put upward pressure on inflation and interest rates before its promised productivity benefits materialize. Speaking at the UBS Australasia Conference in Sydney on November 9, Hunter said AI-related investment was already boosting demand for data centres, energy infrastructure and technology equipment, while there was still “limited evidence that AI has materially lifted aggregate productivity.” She explained that “in the near term, the positive shock to aggregate demand set against the economy’s current supply capacity will put some upward pressure on inflation.”
Hunter noted that Australia’s realized data centre investment had increased tenfold over the past three years, albeit from a very low base. The global investment surge was also contributing to supply-chain pressures, particularly in semiconductors, while demand for data centre construction was stretching some skilled trades. Beyond these immediate pressures, Hunter said competition for capital to finance AI infrastructure “could push up the neutral rate of interest.” She pointed to tentative evidence of this effect, including rising RBA estimates of the neutral rate and recent increases in bond yields, although the magnitude remained difficult to assess.
Over time, Hunter expects expanding capacity and potential productivity improvements to ease AI-related inflation pressures. However, she cautioned that stronger demand would likely accompany increased productive capacity, meaning AI’s long-run effect on inflation was likely to be “broadly neutral.” She also highlighted financial stability risks from the investment boom, warning that disappointing returns could expose equities and corporate debt to “sharp repricing and possibly disorderly adjustments.” The central uncertainty is therefore whether productivity gains emerge quickly enough to justify the scale of investment and offset the initial pressures on demand, inflation and financing costs.
Key Takeaways
- AI-related investment is already adding to demand and inflation pressures, while measurable economy-wide productivity gains have yet to emerge.
- Rising competition for investment capital could push up the neutral interest rate, potentially keeping borrowing costs higher even as productivity improves.
- Hunter expects AI’s long-run inflation effect to be broadly neutral, while warning that disappointing investment returns could trigger sharp repricing in equities and corporate debt.
