Rates may hold for rest of year as Australians struggle under rising costs

The Reserve Bank may hold interest rates steady for the rest of the year as consumers struggle to deal with cost-of-living pressures just as businesses ramp up spending on data centres to levels on track to dwarf the early 2010s mining boom.

Economic growth through the first three months of the year slowed to 0.3 per cent, the Australian Bureau of Statistics reported on Wednesday, as shoppers started to feel the financial hit from high oil prices and the RBA’s February and March rate hikes.

Annual growth remained steady at 2.5 per cent, largely in line with market expectations.

Household spending, which accounts for more than half of total economic activity, lifted by 0.5 per cent last quarter, driven in part by extra expenditure on electricity and gas due to the end of government subsidies.

But in a sign of the hit facing consumers, spending on essentials rose by 0.8 per cent, while discretionary expenditure rose by just 0.1 per cent. Spending on footwear and household equipment dropped by 0.5 per cent while expenditure on eating out at the nation’s cafes and restaurants was flat.

The March quarter results predate the cut in fuel excise, which helped push petrol prices down to around the level they were at before the US and Israel’s war against Iran, and also do not include the RBA’s May rate rise.

While productivity dropped through the quarter, labour costs – a key concern of the Reserve Bank – eased slightly.

As consumers struggle, the data centre revolution and private business investment are holding up the economy.

Private business investment jumped by 6 per cent, driven by a 30-year-high increase in machinery and equipment. In NSW, private capital spending lifted by 9.5 per cent, while it jumped by 3.5 per cent in Victoria.

Through the first three months of the year, NSW businesses spent a record $43.6 billion on new equipment, machines and buildings, while Victorian firms spent an all-time high of $34.6 billion.

The two states are at the centre of the AI-data centre boom. Their expenditure dwarfs what was occurring in Western Australia during the early 2010s mining boom when spending there reached a peak of $32.6 billion.

Almost all of the equipment needed for data centres is imported. That meant net trade detracted 0.8 percentage points from growth, offset by the 0.7 percentage point gain caused by the lift in business investment.

The overall result was also affected by weather events. A series of tropical cyclones, including Koji, Luana, Mitchell and Narelle, through the first three months of the year affected mining and transport-related activities in northern Australia, reducing growth by an estimated 0.3 percentage points.

Government spending fell by 0.2 per cent in the quarter, the lowest quarterly result since September 2022.

Treasurer Jim Chalmers said given the headwinds facing the country, including the war in the Middle East, the economy had performed solidly through the start of the year.

He said Australia’s annual growth rate was faster than almost every developed country, thanks in part to a huge lift in private capital investment that would eventually lift productivity.

“Data centres are a big part of the story today, but not the only part of the story of very strong business investment in our economy,” he said.

But shadow treasurer Tim Wilson said the economy was in trouble before it got hit by both the war and last month’s budget.

“It shows that Australia was in a weaker position going into the Iran crisis and the federal budget. And since then, we know that inflation has persisted and picked up and compounded,” he said.

The Commonwealth Bank’s head of Australian economics, Belinda Allen, said the Reserve was likely to hold interest rates steady through the rest of the year, given the economy was likely to weaken.

“From here the Australian economy is expected to slow, largely driven by softer household spending and dwelling investment,” she said.

“We continue to see the RBA on hold from here in 2026 as the risks between inflation and growth become more balanced.”

HSBC Australia chief economist Paul Bloxham said he believes the economy could already be contracting because of the impact of the Reserve Bank’s three rate hikes and the hit to consumer confidence and spending caused by the war.

“For the RBA, while inflation is still too high, and set to rise a bit further yet, we expect them to be on hold, rather than to hike further, given the economic downturn that is, in our view, already happening,” he said.

Our view, since March, has been that GDP is likely to contract in the June quarter. The risk is rising that there may be two consecutive quarters of falling GDP.”

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