UBS sees no RBA cuts until late 2027 as AI boom fuels inflation, growth slowing to 1.4%
The desk interprets UBS's projection of no RBA cuts until late 2027, driven by the inflationary pressures from the AI boom, while domestic growth is forecast to slow significantly to 1.4%. Per the full note , UBS’s view is more hawkish than market expectations, which are currently leaning towards imminent cuts. This stance is critical as any hot inflation data could pressure the front-end of the Australian bond market, tightening the yield spread and supporting the Australian dollar against volatility in global markets. The consensus on the RBA's trajectory is rarely aligned with UBS, suggesting a disconnect in market pricing and underlying economic fundamentals.
What the desk is arguing
UBS has firmly indicated that the RBA is unlikely to initiate policy cuts until late 2027, attributing this prolonged restrictive policy stance to ongoing inflation largely fueled by burgeoning AI investments. The firm anticipates that while inflation rates may remain elevated, domestic growth will decelerate to 1.4%, suggesting a potentially stagflating environment in Australia. This relates back to the commentary from UBS, noting that the upcoming February RBA meeting might see a risk of hikes if inflation data surprises positively.
The emphasis UBS places on the AI-fueled inflation is significant; in the last three years, data center investment has surged nearly tenfold, evidencing a dramatic shift in the economic landscape. However, UBS points out that this surge has yet to translate into productivity gains, indicating that the immediate inflationary pressures may overshadow longer-term growth prospects.
Where it sits in our coverage
While our internal coverage does not include specific targets for the Australian dollar, we observe that UBS's hawkish stance contrasts sharply with other estimates. This divergence suggests potential market volatility and implies that traders should assign at least a moderate risk premium to Australian dollar positions.
How other firms see it
Several firms have generally painted a more dovish picture compared to UBS. For instance, bofa is among those envisioning a softer stance from the RBA much sooner. On the contrary, jpmorgan aligns somewhat closer to UBS's perspective, albeit leaning more moderately towards future cuts. As such, the landscape remains split, with bofa advocating for cuts as early as mid-2025 juxtaposed against UBS's late-2027 forecast.
For traders, keep an eye on AUD/USD or other pairings that will reflect the RBA's ongoing policy decisions and the global inflation backdrop as influenced by the struggles in the Middle East and other geopolitical factors.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UBS projects RBA will not cut rates until late 2027, despite market pricing favoring cuts sooner.
- 02Current inflation trends are exacerbated by AI investments, impacting both inflation and economic growth.
- 03Domestic growth in Australia is expected to slow to 1.4%, raising concerns around potential stagflation.
- 04The risk of another rate hike remains, particularly if upcoming inflation data overshoot expectations.
Market implications
Watch the front-end Australian bond yields for a reaction to any hot inflation data; levels above current yields may prompt volatility. The upcoming February meeting could serve as a critical inflection point for traders considering rate dynamics.
Risks to this view
Should inflation data come in lower than expected, or if geopolitical tensions ease leading to stable oil prices, this may prompt a reevaluation of the RBA's position, potentially encouraging earlier cuts.
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 2028 In the near term, another hike is more likely than a cut, with February in play if inflation surprises to the upside Data centre investment has risen about tenfold in three years, but there is little evidence yet of productivity gains Australian growth is forecast to slow to about 1.4% in 2027, below most forecasts and slightly under the RBA’s Official household spending growth of 6% to 7% looks at odds with listed retailers’ near-flat trading updates UBS 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.
Sources & References
How we cover this story