Bank of England Governor Warns AI Boom Could Trigger a Financial Market Shock

Artificial intelligence could cause a shock to financial markets, and the UK must prepare for the risk, Bank of England Governor Andrew Bailey has warned.

Bailey said central banks were monitoring the huge sums being invested in AI “very closely”. He also cautioned that “not everyone wins all the time” when markets become focused on the promise of big profits.

Could the AI bubble burst?

Over the past few years, investors have spent and loaned vast amounts of money to AI companies in the hope of significant returns. That investment has helped drive the market value of some companies into the multi-trillion-dollar range.

Asked whether he thought the AI bubble could burst, Bailey told the BBC: “At some point we may see a correction in asset prices.”

In an exclusive interview with the BBC, he discussed the risks and benefits that artificial intelligence could create for the UK economy.

Bailey said AI had “huge potential to enhance economic growth”, adding that this was something the country needed.

“But it also comes with great risks, so we need to be smart about both.”

AI investment is driving soaring valuations

One major risk is what could happen if the biggest bets on AI fail to deliver the expected returns.

AI chipmaker Nvidia is now the world’s most valuable listed company, with a market valuation of $5.5 trillion (£4.14 trillion). Its valuation has been driven largely by investors’ belief in the huge returns that AI can generate.

Meanwhile, technology giants including Alphabet, Meta, Microsoft and Amazon are spending hundreds of billions of dollars on AI.

Anthropic and OpenAI, two of the world’s largest AI companies, are also preparing to sell shares on the US stock market. Many believe this could direct hundreds of billions of dollars more into the AI industry.

“There is currently significant investment in this area, which is not surprising as it is a major growth area,” Bailey said.

“And of course we’re seeing a significant increase in asset prices for the companies that are developing it, which reflects the fact that there are high expectations for what it can deliver.”

‘Not everyone wins all the time’

“Everyone has the potential to be a winner right now,” Bailey said, before issuing a warning: “If you look back, not everyone is a winner.”

He pointed to the history of internet search as an example of how quickly market leaders can disappear.

“The first market leader in internet search wasn’t Google. It was Netscape. Nobody remembers Netscape today. Netscape doesn’t exist. So not everyone wins all the time.”

Bailey said the Bank of England was preparing for the possibility of a major market disruption and would focus on protecting the financial system.

“We are preparing for the fact that there will be some shock in the market and we have to deal with it. We have to ensure the resilience of the system.”