BoE's Bailey: Risk of AI bubble if markets over price returns

BoE's Bailey: Risk of AI bubble if markets over price returns

Potential Risks of an AI-Induced Market Bubble

LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Thursday there could be an artificial intelligence-induced bubble in markets, notwithstanding the large productivity boost the technology would likely deliver.

Impact on Equity Valuations

Speaking after the central bank left interest rates on hold, Bailey said there was uncertainty around future AI returns, but not really about its potential.

Concerns Over Global Demand

"It is, of course, perfectly possible and perfectly consistent that AI could be the next big mover in terms of productivity," he said. "My own view personally is, I think, more likely than not, it probably is.

Future of AI Productivity

"But we've still got quite a way to go to actually sort of see that demonstrated. At the same time, we could have a bubble, because obviously the markets are pricing the future stream of returns from this, and that's uncertain. And so, you know, those two things are not inconsistent."

In the monetary policy report accompanying the interest rate decision, the central bank said equity valuations seemed to be stretched in a historical context, particularly for technology companies focused on AI.

That left equity markets exposed to a correction should expectations around the impact of AI become less optimistic, it said, stating that a resulting reduction in global demand could reduce inflationary pressures in Britain.

"Were that bubble to deflate or burst, that would represent a tightening in financial conditions that would weaken global demand, and that would have spillovers back to the UK," Deputy Governor Dave Ramsden said.

(Reporting by William Schomberg, David Milliken, Muvija M and Suban Abdulla, writing by Kate Holton, editing by Paul Sandle and Andy Bruce)