Bank of England Raises Alarm Over Potential Market Correction
The Bank of England has issued a cautionary statement regarding the increasing likelihood of a “sudden correction” in global financial markets, primarily attributing the concern to inflated valuations of prominent artificial intelligence (AI) technology firms.
Policymakers have highlighted the possibility of a “sharp repricing of US dollar assets” if the Federal Reserve experiences a loss of credibility among international investors.
This warning coincides with continued critiques from former President Donald Trump, who has openly assailed the US central bank and threatened its autonomy.
The prevailing euphoria surrounding AI technology has led to unprecedented surges in company valuations. For instance, OpenAI has escalated its valuation to $500 billion (£372 billion) from $157 billion just a year ago.
Similarly, Anthropic has seen its worth nearly triple, soaring from $60 billion in March to $170 billion last month.
However, the Bank of England’s Financial Policy Committee (FPC) articulated on Wednesday that the risk of a substantial market correction has escalated.
It noted, “Equity market valuations appear excessively inflated, particularly within technology firms specializing in AI. This creates a precarious environment for equity markets should AI growth expectations diminish.”
According to the FPC, investors have yet to fully account for these pressing risks, warning that “a sudden correction could occur” if any of these uncertainties materialize, potentially leading to a liquidity crisis for households and businesses.
They emphasized, “As a global financial center, the UK remains vulnerable to spillover effects from such international shocks.”
Recent research from the Massachusetts Institute of Technology has further unsettled faith in the AI boom, revealing that 95% of organizations are deriving no return on their investments in generative AI.
This data has engendered trepidation regarding plummeting stock market valuations, particularly if investors find themselves disillusioned with the pace or breadth of AI adoption. The FPC cautioned that this could trigger a reassessment of current high expectations for future earnings.
Moreover, the Committee indicated that significant impediments to AI advancement—such as constraints in power, data, or commodity supply chains—as well as pivotal breakthroughs that alter anticipated infrastructure requirements for AI model development, could adversely affect valuations, including for firms reliant on optimistic AI infrastructure investment forecasts.
The FPC also pointed to the ongoing threats posed by the Trump administration towards the US Federal Reserve, asserting that these contribute to financial instability risks.
“In the United States, there has been persistent discourse surrounding the independence of the Federal Reserve,” the committee stated.
“A sudden shift in perceptions regarding the Federal Reserve’s credibility could result in a marked repricing of US dollar assets, including within US sovereign debt markets, thereby amplifying volatility and risk premiums, along with potential global repercussions.”
It underscored that these concerns complement the impacts of Trump’s trade wars, which the FPC asserted are “yet to be fully realized.”
Source link: Theguardian.com.
