AI boom could trigger market shocks, Bank of England governor warns

KUALA LUMPUR, 1 OCTOBER 2026 —

Bank of England Governor Andrew Bailey has issued a stark warning that the unprecedented surge in investment surrounding artificial intelligence could trigger significant financial market shocks, urging that the United Kingdom must be prepared for potential volatility.

The Governor’s comments highlight a growing concern among policymakers that the current valuation of AI firms may be unsustainable, creating a fragile foundation for global financial stability.

Bailey noted that the central bank is watching the huge amounts of money being invested in AI "very carefully" and cautioned that "not everybody always wins." This warning comes at a critical juncture where massive capital inflows are driving asset prices to historic highs, raising questions about the resilience of the financial system in the face of potential corrections.

Bailey explained that the money spent on and loaned to AI firms over the last few years, driven by hopes of large returns, is causing markets to value some of these entities as multi-trillion dollar businesses.

When asked directly if he believed an AI bubble could burst, Bailey responded, "You could see some correction of asset prices at some point." He emphasized that while he believes the technology has "great potential to strengthen growth in our economies," which is something the country needs, it also brings with it substantial risks.

"We have to be on top of both of those," he said, underscoring the dual mandate of fostering innovation while safeguarding financial stability.

The scale of current investment in the AI sector is evident in the market valuations of leading companies. AI chipmaker Nvidia is currently the world's most valuable listed company, with a market valuation of $5.5 trillion (£4.14 trillion), a figure driven largely by investors who believe in the big profits AI could create. Meanwhile, tech giants Alphabet, Meta, Microsoft, and Amazon are spending hundreds of billions of dollars on the technology.

Furthermore, two of the largest AI companies in the world, Anthropic and OpenAI, are preparing to sell shares in their firms on the US stock market. Many observers believe these moves will lead to hundreds of billions of dollars more flowing into the industry, further intensifying the capital concentration in this sector.

Bailey acknowledged the intensity of this capital flow, stating, "There is a large, very large, amount of investment going into this sector now, and of course that's natural because it's a major area of growth." He noted that the asset prices of the companies developing the technology have risen significantly, reflecting high expectations of what the technology can deliver.

However, he warned that "everybody is currently priced to be a winner," a sentiment he contrasted with historical market realities. "You look back at the past, not everybody is a winner," he said, citing the example of internet search. "Google was not the first market leader in internet search. It was Netscape. Nobody can remember Netscape today. It doesn't exist. So not everybody always wins."

The Governor stressed that the Bank of England is prepared for the fact that there will be some shocks to markets and that the institution must ensure the system remains resilient. Beyond market volatility, Bailey pointed to other risks associated with AI, including its use in cyber attacks. He said AI has created a "much more powerful way of uncovering vulnerabilities," revealing things that have been in bits of operating software that everyone has had.

"In the wrong hands... it's a very powerful, potentially very powerful, weapon," he added, highlighting the security implications of advanced AI capabilities.

Another significant risk identified by Bailey is the rise of deepfakes, which are AI-made pictures and videos of people that look real and can be used to fool the public. Bailey has had first-hand experience of this issue, as deepfake images depicting him and Nigel Farage having a physical fight were promoted on the social media platform X in June.

He told the BBC that the fake images were being created in such a way that the Bank has struggled to find out where they came from. "We've got to be able to trace these things back. And we need a lot of help from the tech sector to do that," he said, indicating a need for collaboration between regulators and technology providers to address misinformation.

Despite these risks, Bailey highlighted a major potential benefit of AI for the central bank itself. He said the technology has the ability to "speed up the work that supports the Monetary Policy Committee [MPC]," which sets interest rates.

"It's not taking a decision, but it's a tool in the hands of the policy maker and that's good," he said, suggesting that AI could enhance the efficiency and analytical capacity of monetary policy formulation without compromising human oversight.

Bailey’s warning came against a backdrop of rising government borrowing costs in countries including the UK, US, France, and Japan, which have hit their highest levels in decades, putting pressure on public sector finances. Governments usually borrow money by selling bonds to investors, which are a kind of IOU, and the rate of return on that investment over a certain time period is called the yield.

The lower the price of the bond, the higher the yield. On 30-year UK bonds, the yield rose above 6% on Thursday, its highest level since 1998. For US 10-year bonds, the yield rose to 5.34%, its highest since 2002, indicating a sell-off in the bond markets.

Analysts said there was no particular trigger for this movement on Thursday, but central banks around the world have been raising interest rates to try to combat high inflation caused by soaring energy prices. When interest rates are high, investors tend to choose investments other than bonds, which can start to look more attractive than government debt.

For example, investors have been piling into AI as firms pump money into software development and data centres, a trend that Bailey has been warning about. The interplay between rising bond yields and the AI investment boom creates a complex financial landscape where capital is shifting rapidly between traditional safe havens and high-growth technology sectors.

The Governor’s remarks underscore the delicate balance central banks must strike in an era of rapid technological change and macroeconomic uncertainty. As the UK and other major economies navigate the implications of AI-driven growth, the need for robust financial systems and clear regulatory frameworks becomes increasingly apparent.

Bailey’s emphasis on resilience and preparedness signals that the Bank of England will continue to monitor the AI sector closely, ensuring that the benefits of this technological revolution are realized without compromising the stability of the broader financial system. The coming months will likely see increased scrutiny of AI-related investments and a deeper integration of AI tools into central bank operations, all while managing the risks of market corrections and cyber threats.

Related: Bank of England · Andrew Bailey