Bank of England Governor: AI Bubble Burst Would Hit the UK and Trigger Interest Rate Response
Taylor Wilson
BoE Governor Andrew Bailey warned that an AI stock bubble burst would spill into the UK economy and prompt an interest-rate adjustment — even though the bubble's epicentre is not in London.
The bubble isn't in Britain — so why would Britain get hurt?
Bailey told Parliament's Treasury Committee that no major AI stock is listed in London, yet a global market downturn cannot be walled off.
His exact words: "Even if the core of the burst isn't in the UK, the market effects are now large enough that the shock will wash over."
This means → Britain doesn't need its own bubble. A US AI selloff that crushes global risk appetite is enough to drag UK growth down.
How inflated are AI valuations right now?
The BoE's Financial Stability Report flagged one number: AI companies now account for roughly half of the S&P 500's market cap, up from a quarter in 2022.
If OpenAI, Anthropic and others proceed with planned IPOs, that share will climb further.
In plain terms = half the weight of America's benchmark index sits on AI firms. If those valuations correct together, the broader market can hardly stay standing.
"Every company is priced as a winner" — what does history say?
Bailey invoked the dot-com era: "Right now every company is priced as a winner. But historically, not every one wins."
He cited Netscape — once the dominant browser company, ultimately displaced by Google.
This reflects a deeper concern: markets have already priced "AI will definitely make money" into every participant's stock. The shakeout hasn't started, but valuations assume everyone survives it.
Who else is calling this a bubble?
Michael Burry (the investor behind "The Big Short") and Bridgewater founder Ray Dalio have both publicly warned of AI bubble risk.
Their core argument: even the largest AI developers have yet to prove their models and tools can generate sustainable profit.
Meanwhile, from Alphabet to Oracle, tech giants are funding their AI buildout with hundreds of billions in debt. This means → if the profit thesis fails, the fallout goes beyond falling share prices — there is massive leverage to unwind.
Does the Middle East add another layer of uncertainty?
At the same hearing, Bailey warned that Middle East tensions "suggest this will be a persistently unstable process for the foreseeable future."
He noted that while crude prices have eased, refined-product prices have barely followed — "We're talking about petrol and diesel; those are the end consumer goods."
In plain terms = a drop in headline oil prices doesn't mean the petrol station follows. The inflation pressure consumers actually feel is still there.
What comes next?
The BoE is currently holding rates steady, partly to keep headroom against inflation from a potential US–Iran conflict.
The key test: if AI valuation risk and a global equity downturn materialise simultaneously, will policymakers reopen the rate-cut discussion?
This means → Bailey has effectively laid out a conditional framework — AI bubble bursts + global stocks fall = the UK may cut rates. But if Middle East inflation pressures heat up at the same time, the room to cut shrinks, and policy is caught between two opposing forces.
Content is for reference only, not financial advice.