Bank of England Warns of Rising Systemic Risk Amid Middle East Conflict and AI Exposures

The Bank of England's Financial Policy Committee has flagged rising systemic risk due to higher energy prices, elevated bond yields, and rapid growth in artificial intelligence financing. The committee says these interconnected vulnerabilities are increasing uncertainty around growth and interest rates across advanced economies.

The renewed conflict in the Middle East is pushing up oil, gas, and refined product prices, prolonging global supply shocks. This has driven sovereign bond yields in several advanced economies to levels not seen since 2008. The committee notes that while market adjustments have been mostly gradual, deeper interconnections between risks mean the possibility of a sharp adjustment persists.

The rapid growth in AI-related debt issuance is widening capital markets' exposure to developments in the technology sector. Financing for AI-related investment continues to grow quickly and is expected to remain on a strong upward path. The committee recommends maintaining the countercyclical capital buffer at 2% to preserve resilience in the face of emerging risks.