See more This is Money on Google -save us as a Preferred Source The rise of artificial intelligence could force interest rates to stay higher for longer as a surge in productivity fuels inflation, Bank of England insiders have warned.
If AI delivers a surge in economic output as new tools allow workers to produce more, it could spark increased spending and investment which would push up prices, according to a post on the central bank’s unofficial blog Bank Underground. ‘If households and businesses expect productivity to rise in the future, they anticipate higher future incomes and profits, which changes behaviour today,’ it read.
‘They may start spending and investing before those gains actually materialise.
‘This creates a scenario where demand rises first while supply takes time to catch up.
‘If demand grows faster than supply, inflationary pressures can emerge.’ As a result, it said central banks would need to ‘tighten’ their monetary policy, which often includes raising interest rates, in order to ‘dampen’ inflation.
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The post’s authors, who included Jenny Chan, an adviser to the Bank of England’s interest-rate-setting Monetary Policy Committee, highlighted that a similar trend had occurred in the technology boom of the 1990s, when the rise of computer usage boosted productivity but also fuelled demand and tightened labour markets, pushing up wages and fuelling inflation.
Concerns that the AI boom could potentially fuel a surge in prices came after analysts last week noted that the rising cost of borrowing for some of the world’s biggest economies – including the UK and the US – was being exacerbated by companies taking on even more debt as they rushed to build AI capacity and data centres to power their new technology.
Governments have also been grappling with the fallout from the war in Iran, which has also pushed up borrowing costs as global oil prices have soared.
The surge in borrowing costs presents a fresh headache for new Chancellor John Healey as he draws up plans for his first Budget in October.
UK borrowing costs remain the highest among the G7 group of advanced economies and have shown little sign of improvement since Andy Burnham became Prime Minister a month ago.
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