Bank of England's Bailey Sees Early Signs of AI Supply Boost and Warns of Bubble Risk

Since last week's rout in chip and data-center stocks, the question of whether AI spending is a growth engine or a bubble has moved from the investment desk to the central bank. Bank of England Governor Andrew Bailey answered both ways today, Nov. 9, in a speech at the SIAF lecture series at the University of Zurich.

A supply shock that helps, for once

Bailey spent the first part of his remarks on the shocks hitting the world economy. He pointed to simultaneous military conflicts in Europe and the Middle East, which he said push prices up and activity down at the same time.

Then he turned to the other side. "At the same time, we are seeing growing signs of the beginnings of a positive supply shock coming from AI and the investment required for that," he said.

In the UK, he said, activity is "turning out to be more resilient than we had expected, and some of that is due to AI investment, particularly in the business services sector."

The Bank's November 2026 Monetary Policy Report found that AI-related activity has accounted for nearly one-fifth of UK GDP growth since early 2026. Crypto Briefing, summarizing the speech, put global AI-related debt issuance at about $450 billion by early September, roughly double the 2025 level.

On productivity, Bailey offered a forecast. AI and digital technologies have added a modest 0.5% a year over the past three years, and he expects that could rise to 0.9% a year over the next three.

The appeal for a central bank is plain. A positive supply shock lets an economy grow faster without stoking inflation, which eases the tradeoff between supporting growth and holding prices down.

The bubble warning

Bailey did not leave it there. He flagged what he called a potential "asset price bubble in AI," including the possibility that companies are overvalued or that investor returns take longer to arrive than expected.

"There are good reasons to believe that the world moves faster now, but still the timing may not live up to market expectations," he said. He said a burst would put UK financial stability at risk.

He has made the same point in recent remarks. "Everybody's priced to be a winner," he said, adding that the market's job is to estimate a future stream of returns that "could be positive but the market could overestimate them."

He still described himself as an "optimist on AI, digital technology and most probably robotics too." These technologies, he said, "have the potential to lift the sustainable growth rates of many economies through raising productivity growth. That is a good thing."

Cyber risk and what regulators want

Bailey also said frontier AI "has increased the risk from cyber-attacks," and that broader concerns "may call into question public trust in AI." He called for "more extensive model testing" before and after release, and "better incident reporting, monitoring and follow up."

The National Cyber Security Centre warned last week that Britain faces AI-boosted attacks on critical national infrastructure within the next two years. Chief executive Richard Horne said vulnerabilities can be "discovered and exploited at a scale that was once unimaginable" because of AI.

The market backdrop

Wall Street had a rough week before Bailey spoke. For the week ended Nov. 6, the Nasdaq Composite fell 3.37%, the S&P 500 dropped 2.68% to 7,376, and the Dow fell 0.94% to 51,285. The CBOE Volatility Index jumped 32% to 25.64.

Thursday was the worst day. The iShares Semiconductor ETF fell 12.15%, Advanced Micro Devices dropped 17.24% and Nvidia lost 9.23%. The Nasdaq fell 5.52%.

No one has tied Bailey's speech to that selloff, and he did not comment on specific stocks. But the view that the AI trade is overextended has its own prominent holders. David Bahnsen, chief investment officer of The Bahnsen Group in Newport Beach, California, told The Epoch Times the pullback reflected the risk of a "blow-off top."

"The recent tech-stock pullback does not represent a buying opportunity," Bahnsen said. He added that the worry is "the complacency around risk and the disconnect from valuations and revenue models that make sense."

Bahnsen's argument is about equity valuations. Bailey's is about what a correction would do to the financial system. Both start from the same place: expectations for AI returns that may be running ahead of delivery.

Stress-testing AI

The Bank is already preparing for the downside. One person familiar with the discussions said AI turmoil is among the options for the Bank's next system-wide exploratory scenario, a stress test of the whole UK financial sector rather than individual firms. A second person said no decision has been made. A third said there are options besides AI.

The current round, focused on private markets, is in its final stages and is due to conclude next year. Its hypothetical scenario is a severe global supply and geopolitical shock causing a deep recession, in which AI valuations are hit and AI development is held back.

Regulators have raised several AI-related worries: a valuation bubble, cyber weaknesses, and AI trading agents that respond to a shock in similar ways and amplify market stress.

The Bank has not said whether the next stress test will center on AI, and Bailey's 0.9% productivity estimate will take years of data to confirm or reject.