The Bank of England has raised concerns about a potential “sharp correction” in the values of major technology firms, particularly amid worries about a possible artificial intelligence (AI) bubble. The central bank’s latest financial stability report states that UK share prices are nearing their highest levels since the 2008 global financial crisis, while equity valuations in the US remind observers of conditions leading up to the dotcom bubble burst.
The report emphasizes that valuations for companies that focus on AI are “particularly stretched.” In response to economic conditions, the Bank has proposed reducing capital requirements for High Street banks, which marks the first reduction since 2008. This change aims to encourage lending and stimulate economic growth. Stress tests conducted by the Bank indicate that these banks could withstand severe economic downturns, including scenarios with doubled unemployment rates and significant declines in house prices.
Concerns regarding the AI sector’s growth over the next five years highlight that investments could approach $5 trillion (£3.8 trillion), primarily funded through debt. The report warns that deeper connections between AI firms and credit markets could elevate financial stability risks if there is a significant decline in the value of these companies.
Others, including JP Morgan CEO Jamie Dimon, have expressed worries about the risks of a market correction. The International Monetary Fund and the Organization for Economic Co-operation and Development have echoed these concerns regarding potential price corrections.
In broader economic terms, the Bank of England notes heightened financial stability risks tied to geopolitical tensions and rising borrowing costs. The recommendation to lower Tier 1 capital requirements for banks would take effect in 2027, aiming to facilitate more lending to households and businesses. Additionally, homeowners transitioning off fixed-rate mortgages may face increased monthly repayments, with significant portions projected to refinance at higher rates by 2028.
Source: https://www.bbc.com/news/articles/cx2e0y3913jo?at_medium=RSS&at_campaign=rss