UBS sees no RBA cuts until late 2027 as AI boom fuels inflation, growth slowing to 1.4%

UBS’s view is more hawkish than current market pricing, which has moved towards RBA cuts within months. That leaves front-end Australian bond yields exposed if upcoming inflation data run hot. For the Australian dollar, a longer restrictive period would support rate differentials, but the weak domestic growth outlook limits how much it can benefit. The February RBA meeting is now a live risk if quarterly core inflation stays near a 1% pace. UBS’s upbeat global outlook depends partly on a Middle East resolution bringing oil prices down, so a lasting oil shock would hurt both growth and the inflation outlook.--- UBS says the AI boom is giving Australia the inflation now and the productivity later, which means no RBA cuts until late 2027 and a private sector that will feel like it’s in recession.Summary:UBS expects the RBA to stay restrictive through much of 2027, with cuts unlikely before late 2027 or 2028In the near term, another hike is more likely than a cut, with February in play if inflation surprises to the upsideData centre investment has risen about tenfold in three years, but there is little evidence yet of productivity gainsAustralian growth is forecast to slow to about 1.4% in 2027, below most forecasts and slightly under the RBA’sOfficial household spending growth of 6% to 7% looks at odds with listed retailers’ near-flat trading updatesUBS forecasts global growth of about 3.5% in 2027, above consensus, if the AI boom holds and the Middle East conflict is resolved The AI investment boom is adding to Australia’s inflation problem before it delivers any productivity gains, and that is likely to keep the Reserve Bank of Australia’s policy restrictive well into 2027, according to UBS. The bank’s chief economist for Australasia, George Tharenou, told ausbiz he does not expect rate cuts until late 2027 or 2028. He said that if the RBA does move in the near term, another hike is more likely than a cut.Tharenou said a recent speech by RBA Assistant Governor Sarah Hunter (RBA’s Hunter warns AI could trigger sharp asset repricing as boom adds to inflation ) showed how seriously the central bank is taking the AI shock. The RBA estimates data centre investment has risen about tenfold in three years, and the pipeline of approved projects could see it double again. The eventual productivity gain could be anywhere from 0.1% to 2% a year, but so far there is little evidence of it. For now, Tharenou argued, AI is acting as a demand shock in an economy where capacity is already tight and inflation is too high. That raises the neutral interest rate and argues for tighter policy for longer.That puts UBS at odds with markets, which turned dovish after the RBA’s last meeting and started pricing cuts within months. UBS’s central case is an extended hold. But Tharenou flagged the February meeting as a possible hike if inflation surprises to the upside, particularly if quarterly core inflation runs near a 1% pace. He noted that several board members voted against hiking last time, so it would probably take a clear inflation surprise to change their minds.On growth, UBS expects Australia’s economy to slow to about 1.4% in 2027, below most forecasts and slightly under the RBA’s. AI investment could add up to half a percentage point and government spending remains strong, which makes a technical recession hard to bring about. But outside the AI boom, Tharenou expects the private sector to be close to flat, with falling house prices weighing on consumers and unemployment rising above 5%. In his view, it will feel like a recession even if the data don’t show one.He also questioned the strength of official household spending figures, which have been growing at around 6% to 7% a year, while listed retailers’ trading updates point to growth close to flat. He expects the official numbers to slow sharply over the coming year.UBS is more upbeat about the world economy, forecasting global growth of about 3.5% in 2027, above consensus. That depends on the AI boom continuing and a resolution in the Middle East bringing oil prices down. This article was written by Eamonn Sheridan at investinglive.com.