RBA Warns of AI Bubble Bursting Risk

The Reserve Bank of Australia has issued a warning about the potential risks of an AI bubble bursting in its latest Financial Stability Review. The report highlights that booming investment in artificial intelligence and its infrastructure could lead to financial instability if the market goes bust.

According to the RBA, advances in AI adoption may support earnings growth across the corporate sector over time, but current equity prices reflect very strong expectations regarding future adoption and productivity rates. If these expectations are not realised, or if increasing competition reduces returns on AI-related investment, highly valued AI-exposed firms could be susceptible to sharp repricing.

The RBA notes that almost 30 per cent of investment-grade corporate bond issuance in the United States in the first half of this year came from technology-related firms, and this is expected to grow. By 2030, debt markets could help fund part of as much as US$7.7 trillion in AI capital outlays.

The RBA flagged four key areas of risk should the AI bubble finally burst: circular financing arrangements, potential for overinvestment, debt maturity and asset-life mismatches, and locked-in input commitments.