From Hype to Harm: BoE Warns AI Boom Could Bust, Hitting UK Economy

The Bank of England is warning that the current hype surrounding artificial intelligence could turn to harm, cautioning that a bursting AI bubble poses a material risk to the UK economy. The Financial Policy Committee (FPC) announced that the probability of a “sharp market correction has increased,” with the “stretched” valuations of AI tech firms being a primary cause for alarm.
The committee’s report underscores the massive and rapid inflation in the value of AI companies. OpenAI’s valuation has reached $500 billion, a more than threefold increase in a year, while Anthropic’s value has surged to $170 billion. The FPC fears this growth is speculative and leaves the market extremely vulnerable to a crash if AI’s development or adoption disappoints investors.
Adding a dose of reality to the market’s optimism, recent research from MIT has shown that 95% of organizations are getting zero return on their generative AI investments. This suggests that the market has priced in a future that is not yet materializing. The Bank warned this could lead to a sudden collapse in confidence and stock prices.
Exacerbating the situation is a separate threat from the US political arena. Donald Trump’s ongoing attacks on the independence of the US Federal Reserve are creating another layer of global financial risk. The FPC warned that any erosion in the Fed’s credibility could have severe consequences.
Specifically, it could lead to a “sharp repricing of US dollar assets,” which would disrupt markets worldwide. The FPC made it clear that the UK would be in the line of fire. As an open economy with a global financial centre, the “risk of spillovers to the UK financial system from such global shocks is material,” potentially leading to a credit crunch for British businesses and households.