BoE’s Bailey sees AI boosting UK growth, warns of bubble risks

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

Bailey added that AI, digital technology and robotics have the potential to raise “sustainable economic growth,” while adding that the “AI asset price bubble poses clear financial stability risks.”

Key highlights:

UK economic activity is proving more resilient than expected, partly due to AI investment, particularly in business services.

AI, digital technology and robotics have potential to raise sustainable economic growth through higher productivity.

Growing signs of beginnings of positive supply shock from AI, investment

AI asset price bubble poses clear financial stability risks

AI returns may be strong but markets could overvalue them or returns could take longer than expected to materialize

Frontier AI has increased cyberattack risks, more extensive model testing is needed before and after release

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BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.