Australia’s AI Boom Risks Demand Surge and Higher Rates, BE Says

Australia’s data center boom risks pushing demand beyond the economy’s supply capacity, fueling inflation and requiring the Reserve Bank to run higher interest rates, according to James McIntyre at Bloomberg Economics.

The surge in spending could push capital expenditure above 2% of gross domestic product in 2026-27, McIntyre, BE economist for Australia, said in a research note. He reckons major data-center developments will intensify competition for construction capacity, drawing skilled trades away from renewable-energy developments, infrastructure projects and housing.

“As with other investment surges in Australia, the boom is crowding out activity elsewhere, particularly in non-residential construction,” he said. “Investment in electricity generation, including renewables and transmission, data centers and public infrastructure is placing heavy demands on the rest of the economy.”

The RBA is under pressure to resume raising rates when it meets in three weeks’ time following stronger inflation and GDP data. It has consistently highlighted the need to return the economy to balance, boosting borrowing costs three times between February and May to take the cash rate to 4.35%.

Ivan Colhoun, chief economist at CreditorWatch Pty Ltd., echoed some of BE’s concerns, saying the data center boom would pressure materials prices, labor demand and wages, “meaning the softening in residential approvals and house prices is not as significant for monetary policy as normal.”

Still, McIntyre pointed out that, in time, there would be a productivity payoff from all the investment. “Evolving combinations of drones and remotely operated heavy machinery could displace physical roles in Australia’s capital-intensive mining and agricultural sectors,” he said.