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The Reserve Bank's October Financial Stability Review warned that share prices tied to artificial intelligence already assume a great deal will go right, from adoption and productivity to revenue and profits.

Artificial intelligence runs through much of the Reserve Bank of Australia's recent communication, from inflation to investment. In its October Financial Stability Review, released on 1 October, the RBA turned its attention to what that enthusiasm looks like in financial markets.

Its assessment was measured but pointed. AI-related equity prices, the Review said, "reflect very strong expectations regarding future adoption and productivity rates, revenue growth and profitability".

That sentence does not say AI shares are overvalued, and it does not forecast a fall. What it does is spell out how much optimism is already reflected in prices, and that matters for financial stability because expectations that are very strong leave less room for disappointment.

What the Review actually said

The comment appears in the Review's first chapter, on the global macro-financial environment. It sits alongside a broader observation about risk-taking: "Risk premia in global equity and credit markets remain low by historical standards."

Low risk premia mean investors are accepting relatively little extra compensation for holding riskier assets. Combine that with very strong expectations embedded in AI-related share prices, and the picture is of markets that are pricing in favourable outcomes.

The Review listed four areas where those expectations are concentrated:

  • Adoption: how quickly and widely AI is taken up.
  • Productivity rates: how much more output AI helps generate.
  • Revenue growth: how much income AI-related businesses earn.
  • Profitability: how much of that revenue turns into profit.

Each is a separate assumption, and prices built on all four are sensitive to how each one plays out.

The RBA summarised the Review's wider message: "Australia's financial system has a good degree of resilience, but global and operational vulnerabilities continue to mount". Among the threats the Review listed were "growing vulnerabilities in global financial markets" and "advances in artificial intelligence and critical service provider disruptions".

AI shows up in three places

What makes AI unusual in the RBA's current communication is that it appears in several different contexts at once.

In financial markets. This is the Review's warning about AI-related equity prices and very strong expectations. It sits in the same chapter that notes hedge fund leverage near record highs, with "total repo borrowing by US hedge funds over US$3 trillion".

In prices and inflation. The Monetary Policy Board's statement of 29 September said: "AI-related demand is driving rapid growth in global prices for technology-related goods." Governor Michele Bullock said at her media conference the same day: "The global AI investment boom has driven significant price rises for some inputs within the AI supply chain." In her 18 September statement to parliament, she listed "the AI boom" alongside the Middle East conflict and extreme weather as contributors to upward pressure on prices.

In operational risk. The Review's list of threats includes "advances in artificial intelligence", grouped with critical service provider disruptions. This is a different kind of concern from share prices: it relates to how the technology itself could affect the workings of the financial system.

The RBA's material does not merge these into a single verdict on AI. Each strand is assessed in its own context.

The investment boom behind the expectations

Deputy Governor Andrew Hauser offered a grounded description of what is happening in the real economy. Speaking on ABC's 7.30 on 8 September, he said that to generate the benefits of AI "you first have to put in place the kit", describing a "fairly conventional investment boom".

That framing helps separate two things. The investment phase, building the equipment and infrastructure, is happening now and is showing up in demand and prices. The payoff phase, in which the Review's expectations about adoption, productivity, revenue and profitability would be realised, lies further ahead.

The Board's statement noted that "Growth in business investment and debt is strong." At the same time, Bullock has said that productivity in Australia is "doing nothing", and that "the supply side of the economy has to grow." She did not tie that remark specifically to AI, but it sits alongside the Review's point that market expectations include future productivity rates.

Why it matters for Australia

The Review's headline assessment for Australia remains reassuring. It said "Australian banks are well positioned to continue lending, even in a downturn", and "Most Australian households with mortgages remain well placed to manage more difficult conditions." It also said "system-wide risks to stability posed by non-bank lenders remain contained by their relatively small size".

The value of flagging stretched expectations is in preparation, not prediction. A financial stability review exists to identify where things could go wrong, so that the system is ready if they do. The RBA's warning about AI share prices is one of those markers.

The Review's observations also arrive in a challenging monetary policy setting. The Board raised the cash rate target by 25 basis points to 4.60 per cent on 29 September. Headline inflation, measured by the August monthly CPI indicator, was 4.0 per cent, while underlying inflation has been around 3.5 per cent, according to the Governor. AI is part of that inflation story through technology-related prices.

What to watch:

  • 21 October: Deputy Governor Andrew Hauser speaks at Citi's Australia & New Zealand Investment Conference in Sydney.
  • 26 October: Assistant Governor (Financial System) Brad Jones joins a panel at the AFR Super and Wealth Summit in Melbourne.
  • 3 November: the cash rate decision and the November Statement on Monetary Policy, with updated forecasts.

The RBA has not said whether AI will feature in any of these appearances.

The bottom line

The RBA's October Financial Stability Review cautioned that AI-related share prices "reflect very strong expectations regarding future adoption and productivity rates, revenue growth and profitability", in a global market where risk premia remain low by historical standards. It did not call the prices a bubble or predict a fall. Instead, it placed AI in several parts of its assessment: as a source of market vulnerability, as a driver of technology-related price rises, and as an operational risk. For Australia, the Review's verdict is that the financial system has a good degree of resilience, even as global and operational vulnerabilities continue to mount.