Highlights

  • Business investment rose more than 10% over the year to the September 2026 Board meeting, the minutes recorded.
  • Governor Bullock identified data centres and renewable energy as the primary drivers of the investment surge.
  • The Board found that demand was greater than previously assessed, with June quarter GDP stronger than expected.
  • The FSR noted AI-related optimism was boosting asset prices while also creating operational risk that is accelerating.

Textbook monetary policy says higher interest rates discourage investment by raising the cost of borrowing. What the RBA found in the data heading into its September 2026 decision was something different: business investment had risen by more than 10% over the year, driven by data centres and renewable energy, and it was adding to inflationary excess demand rather than cooling.

The Investment That Did Not Slow

The minutes of the Board's 29 September 2026 meeting recorded business investment as rising more than 10% over the year. At the 28 October Senate hearing, Bullock identified the drivers: "Mainly we're seeing it in data centres and renewable energy." Both represent large capital commitments linked to structural economic shifts rather than short-term cyclical conditions.

Data centre construction reflects investment in AI infrastructure. Renewable energy construction reflects the transition away from fossil fuels and associated policy incentives. In both cases, the investment decision is driven by long-term structural and strategic factors that a 25 or 50 basis point change in the cash rate is unlikely to alter.

What This Means for Monetary Policy

The standard transmission mechanism for monetary policy through investment works via the cost of borrowing. When rates rise, the hurdle rate for projects rises, some investments that were marginally viable become unviable, and capital spending slows. This channel is functioning less strongly in the current cycle because the dominant sources of investment growth are not rate-sensitive in the same way.

The Board's minutes noted that demand was greater than previously assessed and the June quarter GDP was stronger than expected. Both findings pointed to more inflationary pressure in the economy than the August forecasts had incorporated. Investment growth that would normally signal confidence and future productive capacity is instead, in the near term, contributing to excess demand.

The FSR's Assessment of AI Investment

The October 2026 Financial Stability Review, published on 1 October, noted: "Optimism around AI is boosting asset prices and has considerable potential to improve productivity and resilience." The FSR also flagged that AI debt financing is rising in less transparent forms, which complicates assessment of leverage and risk.

The long-run implication of the data centre and renewable energy investment is an expansion of productive capacity. However, the short-run implication, which is what the Board must manage with monetary policy, is that it is adding to demand in an economy already running above potential. The Board assessed excess demand as greater than previously measured.