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Central bank raises alarm over AI-driven market risks
The Bank of England has cautioned that equity valuations for major technology firms, particularly those focused on artificial intelligence, are approaching levels last seen before the dotcom crash. In its latest financial stability report, the bank highlighted growing concerns about a potential sharp correction in AI-related stock prices.
UK and US markets show signs of overvaluation
The Bank noted that share prices in the UK are nearing their most stretched levels since the 2008 financial crisis, while US valuations echo those preceding the dotcom bubble burst in 2000. The report emphasized that AI companies, in particular, are trading at elevated levels, raising fears of a market correction.
Debt-fueled AI growth raises stability concerns
The Bank projected that AI sector expansion over the next five years could be underpinned by trillions of dollars in debt. Industry forecasts suggest spending on AI infrastructure may exceed $5 trillion (£3.8 trillion), with roughly half of this funding coming from external sources, primarily through borrowing.
"Stronger ties between AI firms and credit markets, along with increasing interconnections among these companies, mean that any asset price correction could amplify financial stability risks," the report stated.
Capital requirements eased to boost lending
In a separate move, the Bank announced plans to reduce the capital buffer that high street banks must hold, marking the first such cut since the 2008 crisis. The decision follows stress tests confirming that lenders could withstand a severe economic downturn, including a doubling of unemployment, a 5% contraction in GDP, and a sharp decline in house prices.
The proposed reduction in Tier 1 capital requirements-from 14% to 13%-is set to take effect in 2027. The Bank estimates this will free up £60 billion for lending to households and businesses while maintaining a sufficient safety net.
Mortgage holders face higher repayments
The report also warned that homeowners refinancing fixed-rate mortgages over the next two years could see monthly payments rise by £64 on average, an 8% increase. Approximately 3.9 million mortgage holders-43% of the total-are expected to refinance at higher rates by 2028.
However, the Bank noted that a third of borrowers may benefit from lower payments, as interest rates have declined from their 2022 peak. The Bank of England's base rate has fallen from 5.25% in 2024 to its current 4%.
Geopolitical tensions add to financial risks
The Bank highlighted rising global instability, including trade wars and geopolitical conflicts, as factors increasing financial vulnerability. It specifically warned of heightened risks from cyberattacks and other disruptions stemming from international tensions.
AI sector differs from dotcom era, but risks remain
Bank of England Governor Andrew Bailey acknowledged that today's AI firms, unlike many dotcom companies, generate positive cash flow. However, he cautioned that not all players in the sector would succeed equally.
"It is not inconsistent that AI could become the next general-purpose technology driving productivity growth. I hope it does, but we'll see," Bailey said.
Andrew Bailey, Bank of England Governor
The Bank's warning aligns with concerns raised by other institutions, including JP Morgan CEO Jamie Dimon, the International Monetary Fund, and the OECD, all of which have flagged the risk of a market correction in the coming years.
