The United Kingdom’s financial system is materially at risk from “global spillovers,” the Bank of England has warned, citing the dual threats of a potential AI tech bubble bursting and political turmoil in the United States. The bank’s Financial Policy Committee stated that the probability of a “sharp market correction” has risen, and the UK’s open economy makes it particularly vulnerable.
The primary concern is the “stretched” state of equity markets, especially for companies at the forefront of the artificial intelligence boom. Valuations have skyrocketed, with OpenAI reaching $500 billion and Anthropic $170 billion, driven by intense hype. The FPC cautioned that this leaves markets fragile and prone to a sudden collapse if investor optimism wanes.
The potential for disappointment is significant, according to recent research. An MIT study showing that 95% of companies are getting no return on their generative AI investments suggests the market’s expectations are dangerously high. The Bank warned that a reality check on AI’s profitability could “drive a re-evaluation of currently high expected future earnings” and trigger a sell-off.
Adding to this precarious situation are political pressures on the US Federal Reserve. Donald Trump’s continued commentary questioning the central bank’s independence is a source of major concern for the FPC. The credibility of the Fed underpins the stability of the US dollar, the world’s primary reserve currency.
If that credibility were to be significantly damaged, it could result in a “sharp repricing of US dollar assets” and widespread market volatility. The FPC’s report emphasized that the UK, as a global financial hub, would be directly in the path of such a shockwave. A correction originating in the US could quickly dry up the availability of finance for British households and businesses.