Bank of England Chief Warns of Potential AI-Bubble as Markets Price Hopes on Uncertain Returns
The governor of the Bank of England (BoE), Andrew Bailey, has raised the alarm on the possibility of a bubble forming around artificial intelligence (AI)–related assets, noting that while the technology’s long-term productivity potential is high, the market’s current pricing may be getting ahead of the underlying returns. ([Reuters][1])
Key take-aways:
- Bailey reaffirmed that AI has “clear potential” to significantly boost productivity and become “the next big mover” in the global economy—but he stressed that “we’ve still got quite a way to go” before such gains become reliably visible. ([Reuters][1])
- At the same time, the BoE’s recent Monetary Policy Report flagged that equity valuations in technology firms focusing on AI appear stretched in historical terms. The worry is that markets are discounting a large future stream of returns which may not materialise. ([Reuters][1])
- The risk, as Deputy Governor Dave Ramsden explained, is that if the AI hype overshoots and corrects, this could tighten financial conditions and weaken global demand—which would feed back into the UK economy via weaker export demand or investment. ([Reuters][1])
- Interestingly, the BoE held interest rates unchanged at its latest meeting, suggesting that the institution remains attentive to financial-market risks as well as inflation and growth dynamics. ([Reuters][1])
Why it matters: This cautionary note arrives amid a broader surge of investor interest in AI-driven companies, from silicon-chip makers to software platforms touting large language models. The BoE’s message is a reminder that while the transformative promise of AI is real, the timing, scale and distribution of returns remain highly uncertain. For investors, the implication is that valuations may already reflect a best-case scenario rather than one grounded in current earnings or production data.
From a macroeconomics perspective, a reversal in AI-driven market sentiment could pose a risk to financial stability: if asset prices fall sharply, credit conditions could tighten, investment may slow, and growth could falter. For the UK economy—already exposed to global demand shocks—the BoE views this as a non-trivial channel of vulnerability.
Interpretation for practitioners: For those building trading systems or analysing market signals (I know you are, Sheng), this serves as a red flag around potential regime shifts:
- Monitor valuations in AI-centric tech stocks or ETFs relative to earnings and productivity metrics rather than hype alone.
- Keep an eye on leading indicators of investment in AI infrastructure, hiring, and real-economy adoption, not just stock-market sentiment.
- Recognise that central banks, like the BoE, are increasingly factoring technology-asset valuations into their assessment of financial-conditions risk—so tools that capture broad risk sentiment might improve your system’s sensitivity to a correction scenario.
Glossary:
- Productivity boost: The increase in output (goods or services) per unit of input (labour, capital) facilitated by technologies such as AI. In theory, higher productivity supports stronger growth and potentially higher earnings.
- Valuation: The market’s assessment of the value of an asset (e.g., a stock); often expressed via ratios (such as price/earnings). A “stretched” valuation implies the price is high relative to fundamentals.
- Financial conditions: A broad measure of how easy or hard it is for firms/individuals to finance activity, including interest rates, credit availability and asset-price levels. Tighter financial conditions tend to restrict growth.
- Bubble: A situation in which asset prices rise rapidly to levels that cannot be sustained by underlying fundamentals, often followed by a sharp drop.
Source link: https://www.reuters.com/world/europe/boes-bailey-risk-ai-bubble-if-markets-over-price-returns-2025-11-06/
| [1]: https://www.reuters.com/world/europe/boes-bailey-risk-ai-bubble-if-markets-over-price-returns-2025-11-06/ “BoE’s Bailey: Risk of AI bubble if markets over price returns | Reuters” |
