The rise of artificial intelligence could force interest rates to stay higher for longer in Britain, as a surge in productivity fuels inflation, Bank of England insiders have warned.
If AI delivers a jump in economic output by allowing workers to produce more, it could spark higher spending and investment that pushes 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," the post said. "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, the post said, central banks would need to "tighten" monetary policy, which often includes raising interest rates, in order to "dampen" inflation.
Echoes of the 1990s tech boom
The post's authors included Jenny Chan, an adviser to the Bank of England's interest-rate-setting Monetary Policy Committee. They pointed to a similar pattern during the technology boom of the 1990s, when the spread of computer use boosted productivity but also fuelled demand and tightened labour markets, pushing up wages and inflation.
The Bank of England is the United Kingdom's central bank, and its Monetary Policy Committee is responsible for setting the base interest rate to keep inflation under control. Bank Underground is a blog where Bank staff publish personal analysis and views that do not represent official Bank policy.
Debt-fuelled data centre spending
The warning follows comments from analysts last week, who noted that rising borrowing costs for some of the world's biggest economies, including the UK and the US, were being worsened by companies taking on more debt as they rush to build AI capacity and data centres to power the new technology.
Governments have also been grappling with the fallout from the war in Iran, which has pushed up borrowing costs further as global oil prices have soared.
A fresh headache for the Chancellor
The surge in borrowing costs presents a new challenge for Chancellor John Healey as he draws up plans for his first Budget in October.
UK borrowing costs remain the highest among the Group of Seven advanced economies, comprising the UK, the US, Japan, Germany, France, Italy and Canada, and have shown little sign of improvement since Andy Burnham became Prime Minister a month ago.
