BOE Flags AI-Driven Market Risks as Global Economy Hangs in Balance

The Bank of England has warned that vulnerabilities in the financial system are becoming increasingly interconnected, raising the risk of multiple risks crystallizing at once.

Policymakers identified the multi-trillion dollar AI market as a major vulnerability and cautioned that valuations could suffer a steeper pullback than in July, which could weigh on the world economy and government bond yields.

The BOE added that growth prospects are now partly tied to hopes that AI will boost productivity, so a rethink of those expectations could hit not just AI-related asset prices but also sovereign debt markets.

Hedge funds' use of leverage tied to gilts is still high, with the BOE cautioning that 'persistently higher sovereign yields could contribute to tighter financing conditions for households and business and increased market volatility.'