Can AI boost UK growth? BoE’s Bailey sees gains but warns of bubble risks

The UK economy’s stronger-than-expected resilience was highlighted by Bank of England (BoE) Governor Andrew Bailey in remarks at the Swiss Institute of International Studies SIAF in Zurich, Switzerland. He said that “UK economic activity is proving more resilient than expected, partly due to AI investment, particularly in business services.”

While pointing to the potential for AI, digital technology and robotics to boost “sustainable economic growth,” Bailey also warned that the “AI asset price bubble poses clear financial stability risks.”

What were Bailey’s key messages?

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Partly supported by AI investment, especially in business services, UK economic activity is showing greater resilience than anticipated.

By improving productivity, AI, digital technology and robotics could lift sustainable economic growth.

Evidence is mounting that AI and investment are beginning to generate a positive supply shock.

Clear risks to financial stability arise from the bubble in AI-related asset prices.

Even if AI delivers strong returns, markets could assign excessive valuations to them, or those returns could take longer to materialise than anticipated.

With frontier AI increasing cyberattack risks, models need more extensive testing both before and after release.

BoE: Frequently Asked Questions

What is the Bank of England’s role, and why does it matter for the Pound?

Responsibility for the United Kingdom’s monetary policy rests with the Bank of England (BoE), whose main objective is ‘price stability’, meaning a steady inflation rate of 2%. Adjusting base lending rates is its means of pursuing this goal. By setting the rate at which it lends to commercial banks and banks lend to one another, the BoE determines interest rate levels across the wider economy. The value of the Pound Sterling (GBP) is also affected.

Why does Sterling respond to the Bank of England’s monetary policy?

An inflation rate above the Bank of England’s target prompts it to increase interest rates, raising borrowing costs for individuals and businesses. Higher rates attract global investors to the UK, supporting the Pound Sterling. By contrast, inflation below target signals slower economic growth. In that situation, the BoE will consider cutting rates to make credit cheaper, hoping to encourage businesses to borrow for projects that generate growth. This weighs on the Pound Sterling.

How does Quantitative Easing (QE) work, and what does it mean for the Pound?

When interest rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. The policy substantially expands the flow of credit through a stalled financial system. To carry out QE, the BoE prints money and purchases assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds. The Pound Sterling usually weakens as a result.

How does Quantitative tightening (QT) work, and why does it affect the Pound Sterling?

As the economy strengthens and inflation begins to climb, Quantitative tightening (QT) reverses the process of QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to promote lending. Under QT, it halts further bond purchases and no longer reinvests the principal received when bonds in its existing holdings mature. This generally supports the Pound Sterling.