The Bank of England has warned that the rapid rise of artificial intelligence could be inflating a market bubble, cautioning that major technology firms may be vulnerable to a “sharp correction” in value.
In its latest financial stability report, the Bank said UK equity prices were now close to their most stretched levels since the 2008 financial crisis, while valuations in the US echoed the exuberance seen before the dot-com crash. Companies most exposed to the AI boom were judged to have “particularly stretched” valuations.
Alongside its warning, the central bank announced it would lower the amount of capital commercial lenders must hold — the first such reduction since the 2008 crisis — after stress tests indicated that major banks could withstand a shock scenario involving surging unemployment, a 5% economic contraction and a steep drop in house prices.
AI bubble fears intensify
The Bank said the growth of the AI sector over the next five years would rely heavily on borrowing, with industry forecasts suggesting up to $5tn (£3.8tn) could be spent on AI infrastructure. While AI firms are expected to finance a large share of this investment themselves, roughly half is likely to be funded externally, predominantly via debt.
“Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks,” the report warned.
The Bank joins a widening list of institutions sounding the alarm over the pace of the AI boom. JPMorgan chief executive Jamie Dimon told the BBC in October that he was “far more worried than others” about the prospect of a major market correction. The IMF and OECD have also flagged the risk of steep price reversals.
The warnings revive memories of the late-1990s dot-com bubble, when early internet companies soared on a wave of optimism before their values collapsed in 2000, triggering bankruptcies and job losses. A broad decline in share prices can also erode household wealth, including pension savings.
Fears of an AI-driven downturn come as Chancellor Rachel Reeves used her latest Budget to encourage savers to shift more cash into stocks and shares by lowering the limits on cash ISAs.
‘Not everyone is going to win’
Bank of England governor Andrew Bailey said the AI sector in the US had become “very concentrated,” making up a disproportionately large share of the country’s stock-market value. While he noted that AI firms today enjoy positive cash flows — unlike many dot-com startups — he cautioned that competition within the sector remained intense.
“It doesn’t mean to say everybody is going to win, it doesn’t mean to say everyone is going to win equally,” he said. Bailey added that AI still has the potential to become a “general purpose technology” capable of transforming productivity, but stressed that its long-term impact remains uncertain.
Global risks rising
The Bank said financial stability risks had increased through 2025 due to geopolitical tensions, trade disputes and rising sovereign borrowing costs. Heightened international conflict, it warned, could increase vulnerability to cyber-attacks and other disruptions.
After reviewing lenders’ resilience, the Bank proposed reducing its Tier 1 capital requirement from 14% to 13%, maintaining an estimated £60bn buffer to absorb losses while enabling banks to keep lending. The change is expected to take effect in 2027.
Households face higher mortgage costs
The report also warned that homeowners coming off fixed-rate mortgages in the next two years could face an average increase of £64 per month, amounting to an 8% rise in repayments. Around 3.9 million borrowers — 43% of mortgage holders — are expected to refinance at higher rates by 2028, though about a third will see their payments fall as interest rates continue to ease from the peaks of 2022.
The Bank’s base rate has fallen from 5.25% in 2024 to 4%, reducing borrowing costs across the economy.
